IBC Provisions Prevail Over Kolkata Municipal Corporation Act: NCLT Mumbai

The bench held that claims by the KMC, being in the nature of crown debt, should be classified as government dues and accordingly placed within the waterfall mechanism under Section 53 of the Insolvency and Bankruptcy Code, 2016.

Brief Facts:

The Kolkata Municipal Corporation (Applicant) requested the NCLT to annul the Liquidator's (Gajesh Labhchand Jain) decision which partially rejected its claims. It further sought directions for the Liquidator to admit the entire claim of Rs 34,23,403/- after adjustment from the Suspense Account. Additionally, the Applicant sought a declaration that it is a secured creditor in the liquidation of Talwalkars Better Value Fitness Limited (Corporate Debtor) due to its first charge on the property under the Kolkata Municipal Corporation Act, 1980.

The Applicant also prayed for the NCLT to direct the Liquidator to cancel the auction of the said property or, alternatively, ensure that its dues are paid from the sale proceeds before distribution under Section 53 of the Insolvency and Bankruptcy Code, 2016. It further requested the Liquidator be enjoined from distributing the sale proceeds until its dues are settled and sought an interim stay on the auction and liquidation proceedings during the pendency of this application.

Axis Bank Limited (Financial Creditor) initially filed an application under Section 7 of the IBC Code which resulted in the initiation of the Corporate Insolvency Resolution Process (CIRP) for Talwalkars Better Value Fitness Limited. Mr. Saurabh Kumar Tikmani was appointed as the Interim Resolution Professional (IRP) later confirmed as the Resolution Professional (RP). The Committee of Creditors (CoC) resolved to initiate liquidation proceedings as no resolution plans were received. The NCLT passed a liquidation order.

The Liquidator made a public announcement inviting claims from creditors. The Kolkata Municipal Corporation claimed that the Corporate Debtor owed them property tax amounting to INR 47,77,358/- for the property. The Corporate Debtor previously paid INR 17,49,125/- to the Applicant's suspense account in 2018 but the remaining balance of INR 30,28,233.91/- remained unpaid.

The Liquidator sought the NCLT's direction for the Applicant to vacate and de-seal the premises which was ordered on 2 May 2023. Subsequently, the Kolkata Municipal Corporation claimed a first charge over the premises and filed their claim for INR 51,72,528/- which included the principal amount, interest, and penalty for delayed payment. The Liquidator requested the Applicant to substantiate its claim and its status as a secured creditor which the Applicant argued was established by law under the KMC Act. The Applicant maintained that their security interest was not relinquished and that auctioning the property without addressing their claim violated the IBC.

The Applicant communicated with the Liquidator explaining the calculation of its claim and its status as a secured creditor. However, the Liquidator partially rejected its claim categorizing it as an unsecured operational creditor.

Observations by the NCLT:

The NCLT referred to the decision of the Calcutta High Court where while deciding the Writ Petition filed by KMC challenging an order passed by the NCLT in the case of Kolkata Municipal Corporation and another vs. Union of India and others held that income tax dues, being in the nature of crown debts, do not take precedence even over secured creditors.

The NCLT held that KMC, being in the nature of crown debts, cannot gain precedence over other secured creditors, as contemplated in the Insolvency and Bankruptcy Code (IBC).

The NCLT also referred to the decision of the Supreme Court in the case of Paschimanchal Vidyut Vitran Nigam Ltd (PVVNL) v. Raman Ispat Private Limited where it was held that dues payable or requiring to be credited to the Treasury, such as taxes and tariffs, which broadly fall within the ambit of Article 25 of the Constitution, will be covered by Section 53(1)(e) of the IBC.

Therefore, the NCLT held that the Applicant's reliance upon the provisions of the KMC Act for its claim as a secured creditor of the corporate debtor is misplaced and devoid of merit. Consequently, the Applicant's prayers to be treated as a secured creditor were rejected.

The NCLT held the claim of the KMC, being in the nature of crown debt, should be categorized as government dues and accordingly be placed in the waterfall mechanism under Section 53 of the IBC.

Case Title: Kolkata Municipal Corporation vs Gajesh Labhchand Jain

Case Number: Appeal No.03/MB/2024 In CP (IB) No. 1056/MB/2020

For the Applicant : Ms. Kritika Sethi i/b Aquilaw, Ld. Counsel.

For the Liquidator : Mr. Prakshal Jain a/w Mr. Pushkar Deo i/b Trilegal, Ld Counsel.

Date of Judgment: 19.07.2024

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