Municipal Property Tax Dues Recognised as Secured Claims In Liquidation: NCLAT Holds KMC as a Secured Creditor [Read Order]

The National Company Law Appellate Tribunal (NCLAT)has clarified that municipal property tax dues, when secured by a statutory charge under the governing municipal law, have to be treated as a secured claim in the course of liquidation proceedings, in terms of the Insolvency and Bankruptcy Code, 2016.

Consequently, the NCLAT allowed the Kolkata Municipal Corporation (KMC) to be treated as a secured creditor in the liquidation proceedings of the corporate debtor. Passing orders in favour of the appeal filed by the Kolkata Municipal Corporation (KMC), it was held that the liquidator is incorrect in assessing the dues of the KMC toward property taxes as an unsecured operational debt.

The dispute began in the liquidation of Talwalkars Better Value Fitness Ltd. when the Kolkata Municipal Corporation filed its claim in respect of the arrears of property tax due for its properties held by the corporate debtor. Although the claim was accepted by the liquidator, KMC was given a lower order of preference than operational creditors due to its status as such under Section 53 of the IBC.

Aggrieved by such classification, KMC filed a petition before the NCLAT, claiming that under Section 232 of the Kolkata Municipal Corporation Act, 1980, the dues in respect of municipal property tax rank as a first charge on the property, making the assessees secured creditors.

The appellant Kolkata Municipal Corporation argued that as per Section 232 of the Kolkata Municipal Corporation Act, 1980, the due amount of property tax payable by the assessee represents a first charge over the property of the assessee.It was submitted that once such a charge is created by statute, the Corporation is required to be treated as a secured creditor under the Insolvency and Bankruptcy Code. KMC contended that the existence of a statutory charge does not depend on registration or on the presence of a non-obstante clause in the municipal law.

The liquidator opposed the claim, contending that municipal tax dues are like government dues and, as such, rank lower in priority under Section 53 of the IBC. It was further contended that since there was no overriding clause in the Kolkata Municipal Corporation Act, 1980, the provisions of the IBC would prevail, and the municipal authority could not claim status as a secured creditor.

KMC, on the other hand, placed reliance on binding judicial precedents to argue that statutory charges created under special enactments may survive insolvency proceedings, unless extinguished by IBC Expressly, and no municipal tax claims, which have the backing of such charges, can be put on a par with unsecured dues of the government.

The NCLAT rejected the liquidator’s stand and held that the existence of a statutory charge is sufficient to confer secured creditor status, irrespective of whether the municipal law contains a non-obstante clause. The Tribunal observed that the IBC does not extinguish statutory charges created under other laws unless expressly provided.

Relying on the Supreme Court’s judgments in State Tax Officer v. Rainbow Papers Ltd., Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Pvt. Ltd., and Greater Noida Industrial Development Authority v. Prabhjit Singh Soni, the NCLAT held the authorities in whose name the charge was created as secured creditors in the liquidation context.

The Tribunal, comprising Justice Ashok Bhushan [Chairperson] and Barun Mitra [Technical Member], also specified the following: “Normally, the liability to pay the dues of the corresponding municipality cannot be equated to the liability of paying the dues of the Government when the presence of the statutory liability on the property is concerned.”

Accordingly, the NCLAT set aside the liquidator’s classification and directed that Kolkata Municipal Corporation be treated as a secured creditor in the liquidation process, with entitlement to distribution in accordance with Section 53 of the IBC.

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