The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), has held that the Kolkata Municipal Corporation (KMC) qualifies as a secured creditor by virtue of Section 232 of the Kolkata Municipal Corporation Act, 1980. The Tribunal observed that the statutory provision creates a charge on the property of the person liable to pay property tax, thereby granting KMC the status of a secured creditor within the meaning of the Insolvency and Bankruptcy Code, 2016 (IBC).

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Background

The appeal was filed by the Kolkata Municipal Corporation against the order dated July 19, 2024, passed by the NCLT, Mumbai Bench, Court–IV, which had partly allowed KMC’s application but rejected its claim for recognition as a secured creditor in the liquidation process of M/s. Talwalkars Better Value Fitness Ltd. The corporate debtor’s property situated within the jurisdiction of KMC was assessed for property tax, part of which remained unpaid. A warrant of distress was issued in 2018, but before recovery could be completed, Corporate Insolvency Resolution Process (CIRP) was initiated against the corporate debtor on January 11, 2021.

KMC issued a demand notice on March 22, 2022, for outstanding property tax dues. Following the liquidation order dated April 28, 2022, KMC sealed the property in September 2022. Subsequently, the Adjudicating Authority directed it to de-seal the premises and file its claim before the liquidator. KMC filed its claim for ₹51,72,258 in Form-C on May 12, 2023, which was partly rejected by the liquidator, who categorized KMC as an unsecured operational creditor. The NCLT upheld this view, relying on the Calcutta High Court’s decision in Kolkata Municipal Corporation & Anr. v. Union of India & Ors., (2021) SCC OnLine Cal 145, and held that the dues were in the nature of “crown debts.”

Aggrieved, KMC approached the NCLAT seeking modification of the order and a declaration that it was a secured creditor by operation of law under Section 232 of the Kolkata Municipal Corporation Act, 1980.

Contentions

KMC contended that Section 232 of the Act creates a statutory first charge on the property and movable assets of the person liable for tax dues, thereby constituting a security interest within the meaning of Section 3(30) of the IBC. It argued that by virtue of this statutory charge, it must be treated as a secured creditor. Reliance was placed on the Supreme Court’s decision in State Tax Officer v. Rainbow Papers Ltd., (2023) 9 SCC 545, where the Court held that statutory dues creating a charge over property confer secured creditor status. KMC further submitted that its claim qualified as an operational debt under Section 5(21) of the IBC and was distinct from government dues.

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The liquidator, on the other hand, argued that the ruling in Rainbow Papers was not applicable as Section 232 of the Kolkata Municipal Corporation Act does not contain a non-obstante clause, unlike Section 48 of the Gujarat Value Added Tax Act, 2003, which was interpreted in that case. He further relied on Pashchimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., 2019 SCC OnLine NCLAT 883, and the Calcutta High Court judgment to contend that KMC’s dues are in the nature of government dues, not secured debt.

Findings of the NCLAT

The Tribunal examined Section 232 of the Kolkata Municipal Corporation Act, 1980, which provides that property tax on lands and buildings shall be a first charge on such property, subject only to prior land revenue dues. The Bench observed that the section clearly creates a statutory charge, thereby conferring secured creditor status on KMC. Relying on State Tax Officer v. Rainbow Papers Ltd. (supra), the Bench noted that a “secured creditor” includes any creditor in whose favour a security interest is created by operation of law, and there is no exclusion of government or local authorities from this definition.

The Bench also cited K.C. Ninan v. Kerala State Electricity Board, (2023) 14 SCC 431, and Greater Noida Industrial Development Authority v. Prabhjit Singh Soni, Civil Appeal Nos. 7590–7591 of 2023, to reinforce that statutory provisions or subordinate regulations can create a valid charge over immovable property, entitling the authority to claim the status of a secured creditor.

Further, relying on the Supreme Court’s observations in Pashchimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., (2023) 10 SCC 60, the NCLAT clarified that dues payable to statutory corporations or local authorities do not fall within the category of government dues under Section 53(1)(e) of the IBC. Such statutory dues stand on a different footing and may constitute secured or operational debts depending on their nature. The NCLAT distinguished the Calcutta High Court judgment relied upon by the NCLT, holding that the High Court did not consider the question of secured status under the IBC. It observed that the High Court’s finding that KMC’s dues were “crown debts” was made in a different context and could not override the specific charge created by Section 232.

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The Appellate Tribunal held that the Kolkata Municipal Corporation possesses a statutory charge under Section 232 of the Kolkata Municipal Corporation Act, 1980, and is therefore a secured creditor for the purposes of the IBC. It accordingly modified the NCLT’s order dated July 19, 2024, and directed that KMC’s admitted claim be treated as that of a secured creditor by the liquidator in accordance with law. The appeal was allowed, with no order as to costs.

Appearance

For Appellant: Ms. Anju Thomas, Ms. Pratibha Yadav, Ms. Astha Sharma, Ms. Kritika Sethia, Mr. Piyush Agarwal, Advocates.

For Respondents: Mr. Mohit Rohatgi, Mr. Ashwini Kumar Tak, Ms. Aditi Nemakal, Mr. Karan Trehan, Advocates.

Cause Title: Kolkata Municipal Corporation V. Gajesh Labhchand Jain (Liquidator)

Case No: Company Appeal (AT) (Insolvency) No. 1833 of 2024

Coram: Justice Ashok Bhushan (Chairperson) and Barun Mitra (Member-Technical)