2026 IBC Amendment Excluding Security Interests Created By Operation Of Law To Apply Prospectively: NCLT Mumbai

The National Company Law Tribunal (NCLT) at Mumbai has recently held that an explanation inserted into the Insolvency and Bankruptcy Code (IBC), excluding security interests created merely by operation of law from the definition of “security interest," will operate prospectively from May 26, 2026.

A bench of Judicial Member Sushil Mahadeorao Kochey and Technical Member Prabhat Kumar observed that the amendment introduces a substantive restriction on the earlier definition. It cannot retrospectively nullify security interests already created by operation of law.

"In view of the aforesaid, we are of considered view that a substantial case exists for holding that the Explanation inserted in Section 3(31) of the IBC introduces a substantive restriction upon the pre-amendment definition and should therefore operate prospectively from 26 May 2026, the date on which Section 2 of the Insolvency and Bankruptcy Code (Amendment) Act, 2026 was brought into force," the tribunal ruled. 

The ruling came on a challenge by Sane Guruji Premises Co-operative Society Ltd. to the treatment of its ₹23.54 lakh claim for pre-CIRP dues of Amar Remedies Ltd. as an unsecured operational claim.

The society claimed that its dues were secured by a first charge under Section 47 of the Maharashtra Co-operative Societies Act.

The CIRP against Amar Remedies commenced on June 16, 2017. A resolution plan approved on March 25, 2021 was not implemented, and the company was ordered to be liquidated on March 11, 2024.

On May 28, 2026, the Liquidator treated the Society's claim as an operational creditor claim rather than a secured operational creditor claim. The society challenged this, relying on the first charge created under Section 47 of the Maharashtra Co-operative Societies Act.

The tribunal treated the Society's application as an appeal under Section 42 of the IBC and condoned the delay in filing it.

On the merits, the tribunal relied on the Supreme Court's ruling in State Tax Officer v. Rainbow Papers Ltd., which held that the pre-amendment definition of “security interest” under Section 3(31) covered security interests created by operation of law.

The tribunal accordingly held that the charge created under Section 47 of the Maharashtra Co-operative Societies Act made the Society a secured creditor in respect of those dues.

The 2026 amendment subsequently inserted an explanation into Section 3(31). It provides that a security interest exists only where a right, title, interest or claim to property is created pursuant to an agreement or arrangement by the act of two or more parties. It excludes a security interest created merely by operation of law.

The issue before the tribunal was whether this Explanation was merely clarificatory and therefore retrospective. The other question was whether it changed the existing law and would operate prospectively.

The tribunal referred to the Supreme Court's ruling in Sree Sankaracharya University of Sanskrit v. Manu. The Supreme Court held that merely describing a provision as an explanation or clarification does not determine its legal effect. The court must examine whether the amendment merely clarifies existing law or substantively changes it.

It also relied on M.M. Aqua Technologies Ltd. v. Commissioner of Income Tax. There, the Supreme Court held that an amendment introduced “for the removal of doubts” cannot be presumed to be retrospective if it alters or changes the law as it previously stood.

Applying these principles, the tribunal observed that there was no ambiguity in the pre-amendment definition of security interest. Rainbow Papers had already held that the definition covered security interests created by operation of law.

The tribunal further observed that the Explanation introduced an additional requirement. A security interest must arise from an agreement or arrangement involving two or more parties.

A security interest created by operation of law before the amendment, therefore, could not be negated by the subsequent explanation. Retrospective application would nullify such existing security interests.

The tribunal also considered a 2026 Madras High Court decision in Avenue Realty v. Assistant Commissioner, which had held that the amendment was clarificatory and retrospective.

The bench, however, noted that the decision had not considered P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd.

The tribunal then examined P. Mohanraj in relation to the definition of “transaction” and whether a debt or liability necessarily has to arise from an agreement or arrangement.

It also considered the Supreme Court's decisions in Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat (P) Ltd. and Greater Noida Industrial Development Authority v. Prabhjit Singh Soni.

The tribunal ultimately held that the Madras High Court decision could not be followed as a binding precedent.

With that reasoning, the tribunal held that the Explanation inserted into Section 3(31) introduces a substantive restriction on the pre-amendment definition. It should operate prospectively from May 26, 2026.

It consequently held that the Society's claim merits admission as secured debt in the liquidation process. The claim is to be treated for the purposes of Section 53 of the IBC.

The application was allowed and disposed of.

For Applicant: Advocates Prateek Kushwaha a/w Dhimaan Dutta

For Respondent: Advocates Abhinav Mathur a/w Lokesh Pawaskar