Statutory tax charge cannot override liquidation waterfall where the claim is unadmitted and no consensual security interest exists.

A statutory charge for VAT arrears created merely by operation of law was treated as insufficient, by itself, to constitute a security interest under the Insolvency and Bankruptcy Code, 2016. In liquidation, an unadmitted or time-barred tax claim could not override the Section 53 waterfall or defeat a sale of the corporate debtor's property to an auction purchaser. The court distinguished Rainbow Papers on the basis that it concerned the resolution process and an earlier regime, and relied on the later clarification to Section 3(31) that a security interest must arise from an agreement or arrangement. The attachment was therefore ordered removed, with consequential encumbrance entry directed.

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Issues: Whether an auction purchaser of a corporate debtor's property sold in liquidation under the Insolvency and Bankruptcy Code, 2016 can seek removal of an attachment raised for VAT arrears, and whether the State tax authority's statutory charge under the Tamil Nadu Value Added Tax Act, 2006 makes it a secured creditor whose dues override the liquidation distribution scheme.

Analysis: The attachment was founded on arrears of tax under Section 42 of the Tamil Nadu Value Added Tax Act, 2006, but the tax department's claim had not been duly admitted in the liquidation process and had been rejected as time-barred. The statutory scheme under the Insolvency and Bankruptcy Code, 2016 distinguishes a secured creditor from a person in whose favour no consensual security interest has been created, and the liquidation estate is distributed under the waterfall mechanism in Section 53. The decision in Rainbow Papers was distinguished on the footing that it arose in the resolution process and on an earlier regulatory regime, whereas the present case was in liquidation after amendment of the claim procedure. The Court also treated the later clarificatory amendment to Section 3(31) as reinforcing that a security interest must arise from an agreement or arrangement and not merely by operation of law. In that setting, the prior attachment could not defeat the auction sale or be treated as reviving an unadmitted claim.

Conclusion: The auction purchaser is entitled to have the attachment removed, and the tax department's claim cannot prevail as that of a secured creditor against the liquidation sale.

Final Conclusion: The writ appeal succeeds, the attachment is set aside, and the registering authority must make the consequential encumbrance entry so that the purchaser may deal with the property free from the earlier attachment.

Ratio Decidendi: A statutory charge created merely by operation of law does not by itself constitute a security interest under the Insolvency and Bankruptcy Code, 2016, and an unadmitted or belated tax claim cannot override the liquidation waterfall or invalidate a sale made in liquidation.

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