Few stakeholders in the Indian insolvency ecosystem have fought as tenaciously or as creatively as statutory land authorities. Industrial development authorities, from Noida and Greater Noida (“GNIDA”) to their counterparts across Uttar Pradesh and beyond, have long claimed that statutory charges under land development legislation elevate them to the status of secured creditors in insolvency proceedings, entitling them to priority over banks, financial institutions, and all other creditors. The Insolvency and Bankruptcy Code (Amendment) Act, 2026 (“2026 Amendment”), enacted on April 6, 2026, has now pulled the rug from under their feet by amending the very definition of “security interest” under Section 3(31) and inserting an unambiguous Explanation into Section 53(1)(e)(i) of the Insolvency and Bankruptcy Code, 2016 (“IBC” or “Code”). This article traces the judicial journey from Rainbow Papers through the GNIDA saga that supported land authorities and examines how the 2026 Amendment has decisively ended land authorities’ secured creditor fantasy.
The Seed that Sprouted a Forest: Rainbow Papers and the Land Authority Playbook
The origin of this is seeded not with a land authority but with a tax department. In State Tax Officer v. Rainbow Papers Ltd. (2022), the Supreme Court held that the State’s claim under the Gujarat Value Added Tax Act, 2003, which created a statutory first charge over the corporate debtor’s assets, qualified as a “security interest” under Section 3(31) of the IBC. The Court reasoned that a security interest could arise by operation of law, and that the definition of “secured creditor” under Section 3(30) did not exclude any government or governmental authority. The practical consequence was seismic: government dues, traditionally ranked at the lower tiers of Section 53(1)(e), were effectively elevated to secured creditor status under Section 53(1)(b)(ii), thereby leapfrogging unsecured financial and operational creditors. The review petition was dismissed on October 31, 2023 in Sanjay Kumar Agarwal v. State Tax Officer (2023), further entrenching this position.
For land authorities, Rainbow Papers was nothing short of a playbook. If a VAT statute could create a security interest by operation of law, then surely the statutory charges under land development legislation, such as Section 13A of the Uttar Pradesh Industrial Area Development Act, 1976 could do the same. While the Bankruptcy Law Reforms Committee (BLRC) report of November 2015 had recommended, the right of the Central and State Governments was intended to be lower in priority than the dues of secured and unsecured creditors, yet Rainbow Papers upended this hierarchy, and land authorities were the first to seize the opportunity.
A Crack in the Armour: Raman Ispat Sounds the Retreat
The Supreme Court itself appeared to recognise the anomaly. In Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd. (2023), the Supreme Court observed that government dues are placed much lower in priority than the dues of secured creditors, and that Rainbow Papers did not take note of the waterfall mechanism under Section 53 of the Code. Its ratio, the Court said, must be confined to the facts of that case alone. This was a significant judicial retreat, but for land authorities, it made little difference. Rainbow Papers had not been expressly overruled, and its precedential value remained intact. Statutory land authorities continued to press their claims.
GNIDA at the Gate: When the Landlord Demanded a Seat at the Creditor Table
The GNIDA litigation represents one of the most significant attempts by a land authority to leverage Rainbow Papers for secured creditor status. The trenches comprised a real estate insolvency, the kind of case where land authorities have the most at stake, especially when the very asset being resolved is often the land allotted by them on long-term lease.
In the National Company Law Tribunal (“NCLT“) Delhi ruling in VMS Equipment v. Primrose Infratech Private Limited (2023), GNIDA contended that by virtue of Sections 13 and 13A of the Uttar Pradesh Industrial Area Development Act, 1976 (“UPIADA“), a statutory charge existed over the corporate debtor’s property, making it a “secured creditor” under the IBC. The factual backdrop was typical of land authority claims: GNIDA, a statutory authority constituted under Section 3 of the UPIADA, had executed a registered lease deed in favour of the corporate debtor for developing group housing. The corporate debtor defaulted on allotment premium, additional compensation, and time extension penalties, and GNIDA submitted claims of approximately Rs. 55 Crores. The NCLT agreed with GNIDA, holding that “security interest” under Section 3(31) includes “charge,” and that since the charge was created by operation of law prior to the corporate insolvency resolution process (“CIRP”), it was not inconsistent with the IBC and Section 238 would not apply.
Critically, the NCLT also held that a charge created by virtue of law, even if not registered under Sections 77 and 78 of the Companies Act, 2013, could not be questioned merely because the charge was not registered. However, the NCLT left the essential question of payment priority unanswered, stating that it would not “espouse at what priority” GNIDA would be placed under the waterfall mechanism. This half-measure, viz. recognising secured creditor status while leaving the priority question open, emboldened land authorities across the country to contest matters seeking elevated payment priorities for their land dues from allottee and lessee companies undergoing insolvencies.
The stakes were raised further in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni & Anr. (2024), where the Supreme Court waded into the dispute. Here, GNIDA had allotted a plot of land on a 90-year lease to the corporate debtor, charging premium payable in instalments. When the corporate debtor defaulted and CIRP was initiated, GNIDA submitted a claim as a financial creditor. The resolution professional, however, treated GNIDA as an operational creditor and asked it to re-submit its claim in Form-B. GNIDA did not re-submit, the committee of creditors approved a resolution plan without GNIDA’s participation, and the plan was approved by the NCLT. The Supreme Court set aside the approval of the resolution plan, holding that the plan failed to acknowledge GNIDA’s claim, incorrectly projected it as a creditor who had not submitted a claim, and did not place GNIDA in the category of a secured creditor despite the statutory charge under Section 13A of the UPIADA. The Court further observed that where a resolution plan envisages use of land not owned by the corporate debtor but by a statutory authority like GNIDA, bound by its own rules and regulations having statutory flavour, there must be a closer examination of the plan’s feasibility. The matter was remanded for re-submission of the resolution plan, effectively affirming that a statutory charge could create a security interest entitling a land authority to secured creditor treatment. However, even in this case, the order of priority of claims of such land authorities and the question of their status as a financial creditor, was left open for interpretation by the Supreme Court.
The Legislature Speaks: Pulling the Rug on Statutory Charges
Against this backdrop, where land authorities were winning battles in tribunals and the Supreme Court on the strength of Rainbow Papers, the legislature intervened with surgical precision through the 2026 IBC Amendment. Two amendments are of cardinal importance, and both strike at the very foundation on which land authorities built their claims.
First, an Explanation has been inserted into Section 3(31), clarifying that a security interest shall exist only if it creates a right, title, or interest or a claim to property pursuant to an agreement or arrangement by the act of two or more parties, and shall not include a security interest created merely by operation of any law for the time being in force. For land authorities, this is damaging, because the entire edifice of claims by bodies like GNIDA rested on statutory charges under legislation such as Section 13A of the UPIADA — charges created not by agreement between GNIDA and the corporate debtor, but by the unilateral operation of the statute upon default in payment of lease rentals or allotment premiums. Under the amended definition, such statutory charges will no longer qualify as a “security interest” under the Code. Only consensual, contractually created security arrangements, i.e. mortgages, hypothecations, pledges created by agreement between parties, will enjoy secured creditor status.
Second, an Explanation has been inserted into Section 53(1)(e)(i), which is the waterfall mechanism provision, clarifying that any amount due to the Central or State Government, whether or not a security interest is created to secure such amount, by act of two or more parties or merely by operation of law, shall be distributed under sub-clause (e)(i) for the period of two years preceding the liquidation commencement date, and any remaining amount shall be distributed thereafter under sub-clause (f), which pertains to ‘any remaining debts and dues‘. This is a belt-and-braces approach: even if a statutory charge were to survive the amended definition, it would still be irrelevant for the purposes of the waterfall. Government dues are fixed at their designated tier i.e. much lower in the waterfall and much after secured and unsecured financial creditors.
The Domino Effect: What Falls when the Statutory Charge Falls
The amendments render the core holdings of Rainbow Papers, the GNIDA NCLT ruling, and the Prabhjit Singh Soni judgment effectively inoperative in so far as they recognised statutory charges as security interests conferring secured creditor status. For land authorities specifically, the consequences are profound. The NCLT’s finding in VMS Equipment that GNIDA was a “secured operational creditor” by virtue of the UPIADA, a finding that had opened the floodgates for similar claims by development authorities across the country, is now legislatively nullified. The Supreme Court’s direction in Prabhjit Singh Soni to remand the resolution plan for re-submission after treating GNIDA as a secured creditor would, under the amended framework, require a fundamentally different outcome: GNIDA’s claim would be treated strictly as an operational debt, and any statutory charge under Section 13A of the UPIADA would be irrelevant for the purposes of creditor classification.
The Explanation to Section 3(31) is worded as a clarificatory provision (“for the removal of doubts“), which suggests retrospective applicability. This means that even pending matters, including the very re-submission directed in Prabhjit Singh Soni, may be affected. Resolution professionals now have clear legislative guidance with respect to admission and priority order of statutory dues of land authorities.
The Way Forward: What Can Land Authorities Do Now?
For land authorities and their counterparts, the path ahead requires a fundamental recalibration of strategy. Their claims, whether for unpaid lease premiums, allotment charges, additional compensation, or time extension penalties will henceforth be treated strictly within the confines of Section 53(1)(e) and (f), i.e., below secured creditors, workmen’s dues, employee dues, and unsecured financial creditors. The days of claiming parity with banks holding mortgages on the very same land are over.
However, land authorities may not be without remedies. Their unique position as lessors and owners of the underlying land, a fact the Supreme Court itself recognised in Prabhjit Singh Soni when it observed that the plan’s feasibility depends on approvals from the statutory authority that owns the land, gives them considerable practical leverage even without secured creditor status. A resolution plan that envisages use of land owned by a development authority cannot succeed without that authority’s cooperation and approval. This commercial reality may prove to be a more potent weapon than any statutory charge. Further, land authorities may, if they so desire, create security interest on the land through duly executed agreement or arrangements.
For resolution professionals, the amendment eliminates some litigations. The categorisation of land authorities as operational creditors, as was initially done by the resolution professional in Prabhjit Singh Soni, is now reinforced by the statutory framework itself. Resolution applicants can now assess the viability of plans without the spectre of land authority claims disrupting established priorities.
Conclusion: The Land Authorities Must Queue Like Everyone Else
The 2026 IBC Amendment represents decisive legislative intervention on the question of statutory charges and the insolvency waterfall. For land authorities, who were beneficiaries of the Rainbow Papers ratio, the new message is clear: statutory charges under land development legislation do not automatically create security interests under the Code, and government dues remain anchored to sub-clauses (e) and (f) of Section 53(1). The judicial journey from Rainbow Papers through Raman Ispat, the GNIDA NCLT ruling, and Prabhjit Singh Soni have culminated in a legislative settlement that will not allow land authorities to claim secured creditor status in the absence of an agreement in this regard and restore the foundational design of the Code. The land authority, however powerful, must now queue behind the banker under IBC now. For an insolvency regime built on the promise of certainty and time-bound resolution, this clarity was long overdue. Watch this space for more as we keep tracking evolving jurisprudence on this subject.
(Views are personal)
