I. Introduction
Lien is a common law right to retain possession of another’s goods until a debt is paid. Some liens are statutory like an unpaid seller’s lien under the Sale of Goods Act, 1930, or a vendor’s lien under the Transfer of Property Act, 1882 (‘TPA’). They come into force owing to the operation of a statute. Whereas some liens are possessory like general lien of bankers, attorneys, factors, etc. under the Indian Contract Act, 1872 (‘ICA’). All of these liens grant the lien-holder a security by retention, but not an immediate right to sell the asset unlike other charges like pledge, mortgage, etc. A National Company Law Appellate Tribunal (‘NCLAT’) ruling in V O Chidambaranar Port Authority v. Shri Rajesh Chillale reinforces this in the context of the IBC. It rules that to make a claim under IBC as a secured creditor; possession of goods is sine qua non.
Section 3(4) of the IBC define ‘charge’ as an interest or lien created on the property or assets of any person or any of its undertakings or both. A charge created by a company can be first, an exclusive charge, second, a pari-passu charge or third, a first/second charge. Section 48 of TPA is an example of the last scenario. By virtue of this arrangement, the realisation of the charge is graded with the claims of first charge holder prevailing over the second. Subsequently, at the core of the IBC is the differentiation of creditors, firstly, as secured and unsecured and secondly, as financial and operational. This arrangement is important with respect to Section 53 of the IBC commonly known as the “waterfall mechanism” wherein the claims of the secured creditors prevail over the claims of unsecured creditors. However, there is no further sub-division of secured creditors into secured financial or secured operational creditor. This problem was envisaged in the Supreme Court (‘SC’) judgement of M/S Vistra ITCL (India) Ltd v. Dinkar Venkatasubramanian.
Thus, the IBC ostensibly treats all secured creditors equally in liquidation, regardless of whether the security arose from a contract or a statute and irrespective of the priority of their charge. Therefore, a bank which has floated a loan to a debtor is equated to a lien holder who retains possession of some goods as security for the payment of the services rendered by them. However, this equivalence has some serious legal ramifications which shall be detailed in the ensuing parts.
II. Basis for Treating Lien as a Security Interest
There are several arguments which strongly favour the inclusion of lien under the definition of ‘security interest’ under the IBC.
A. Statutory Basis for Inclusion
Section 3(4) of the IBC states explicitly that a ‘charge’ means an interest or lien created on the property. Section 3(31) defines ‘security interest’ as a right, title or interest or a claim to property which secures payment or performance of an obligation and includes mortgage, charge, hypothecation, assignment and encumbrance. This section is very widely worded owing to the use of the phrase “any other agreement or arrangement securing payment”. Section 3(30) defines secured creditor simply as a creditor in whose favour a security interest is created. Additionally, the use of the term ‘lien’ beside pledge, mortgage, hypothecation under Section 3(34) buttresses the view that liens are intangible encumbrances contemplated by the IBC. A perusal of all these sections would show the Parliament’s intent to treat liens as a species of security interest. There is one ruling of the NCLAT in Home Kraft Avenues v. Jayesh Sanghrajka which supports this.
B. The Rainbow Papers Effect and Statutory Supremacy
The most compelling judicial support for viewing statutory liens as security interests comes from the SC decision in State Tax Officer v. Rainbow Papers Ltd. (‘Rainbow Papers’). This case established that a State Government was a secured creditor under the IBC by virtue of a statutory charge created for tax claims under the Gujarat Value Added Tax Act, 2003. The SC confirmed that a security interest can be statutorily created. Additionally, it relied upon the non-obstante clause in Section 53 to hold that asset distribution remains unaffected even if a lower-priority creditor attains secured status under another statute. Therefore, a lien created statutorily would come under the ambit of “security interest”.
C. No Legislative Exclusion and Historical Precedents
Section 3(31) of the IBC lists various types of security interests and expressly excludes performance guarantees; though it does not except liens. In contrast to US Law, where a security interest is only a lien created by agreement, IBC has no carve-out for statutory liens. Given this silence, a purposive interpretation favours inclusion. Earlier cases in the pre-IBC era, i.e. under the Presidency-Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 recognised a lien on property as a security interest, as reflected in their definitions of “secured creditor”. The absence of such definitional clarity in the IBC has contributed to the present ambiguity.
III. Examining Grounds for Rejecting Lien as a Security Interest
Conversely, significant cases and legal interpretations under the IBC support the view that a lien should not be treated as a security interest, however, the reasoning behind these views does not withstand closer scrutiny.
A. Creation by Law, not by Transaction
A key phrase in Section 3(31) is that the security interest is “created in favour” of a secured creditor by a transaction. It is argued that this implies consensual creation and not one arising solely by law. Thus, by a narrow textualist view, liens fall outside the definition. The NCLAT endorsed this interpretation in BHEL v. Anil Goel. It rejected BHEL’s unpaid-seller lien as a valid security interest under the IBC. However, the rationale in this decision is erroneous as it is contrary to a line of cases which state that statutory creation of a lien does not militate against its recognition as a security interest.
B. Raman Ispat and Judicial Recalibration
Post the judicial finding in Rainbow Papers, the SC was tasked with another case of similar factual matrix. In PVVNL v. Raman Ispat (‘Raman Ispat’), the State authority asserted secured creditor status for the outstanding electricity dues, treating them as statutory first-charge under the Electricity Supply Code 2005. The SC accepted the PVVNL’s position as a secured creditor however, departing from Rainbow Papers, it ruled that this conferral would not place them in the same basket as secured creditors. The rationale provided for the same was the legislative intent to differentiate and grade the claims of the Government and other creditors under Section 53(1)(f). Additionally, Section 238 was taken aid of to emphasise IBC’s overriding effect over other statutes. Therefore, a lien created statutorily could get overridden due to Section 238’s operation.
Subsequently, a review petition was filed against Rainbow Papers in light of the observations in Raman Ispat. However, the same was rejected as it could not show a mistake or an error apparent to warrant a review. Moreover, the approach in Raman Ispat, which departed from a coordinate bench’s ruling, was improper. When differing from a ruling of equal strength, a bench should refer the matter to a larger bench to avoid legal uncertainty. Therefore, the decision in Raman Ispat is bad in law.
C. Verification and Registration Requirements
Even if one treats a lien as a security interest, IBC imposes strict verification. A secured creditor has two options upon the commencement of liquidation. They may either relinquish their security interest to the liquidation estate and receive proceeds distributed under Section 53 waterfall. Alternatively, they can choose to remain outside the liquidation process and realise their security interest independently. For a statutory lien holder, who is typically an operational creditor, independent realisation is the preferred route. This is because realisation from a specific asset often guarantees 100% recovery, circumventing the inter-se priority issues.
However, the decision to realise independently is subject to a mandatory verification under Section 52(3). The liquidator is required to verify the existence of the security interest using records from an Information Utility, Registrar of Companies registration, or CERSAI registration. This requirement creates the central procedural challenge for statutory lien holders. Because these liens arise automatically by law, they generally lack the formal registration records. There are NCLAT orders which rule that in absence of the charge being registered, the charge holder cannot be treated as secured financial creditor. However, there also exist orders which state to the contrary and rule that non-registration would not vitiate the recovery of the debt. However, since the facts of these orders apply to contractual creditors, the legal position with regard to statutory lien holders needs a conclusive finding.
IV. Conclusion
To restore commercial certainty and validate the expectations of financial creditors, legislative clarity is essential. The legislature must revisit the applicability of inter se priority of charges in liquidation, potentially integrating the principle of Section 48 of the TPA back into Section 52 of the IBC or establishing a clear statutory ranking hierarchy. A robust solution involves amending the distribution mechanism in Section 53 to specifically categorise and rank secured operational creditors, i.e. statutory lien holders lower than secured financial creditors. This aligns with the overall IBC framework of prioritising financial over operational debt. Additionally, Section 52(3) should be amended to explicitly accept verification through certified copies of the underlying statute and documentary proof of possession or the transaction that gave rise to the lien, ensuring that the liquidator can verify existence without exceeding their procedural mandate. Furthermore, as noted in the IBBI report, importing the SARFAESI 60 per cent rule could be incorporated into IBC to let the creditor majority bind dissenting lien-holders to prevent deadlocks when minority holders refuse to release their liens.
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