Statutory charge u/s 232 KMC Act overrides IBC’s General Priority Mechanism: Calcutta HC upholds Property Tax Liabilities on Auction Buyers, dismisses Writ Petition [Read Order]

In a recent judgment, the Calcutta High Court dismissed a writ petition filed by auction purchasers challenging demands for pre-purchase property tax arrears and upheld the property tax liability of auction purchaser despite of Insolvency Bankruptcy Code (IBC), 2016.

It was observed that the statutory charge under Section 232 KMC Act overrides the IBC’s general priority mechanism.

The petitioners, Cotton Casuals India Ltd acquired four leasehold factory units and six car parking spaces at Paridhan Garment Park, Kolkata, through an e-auction conducted under the IBC liquidation process of M/s Enfield Apparels Ltd. Possession was handed over on 19.01.2022, and deeds of assignment were executed on 07.05.2022. When seeking mutation of the properties, the Kolkata Municipal Corporation (Respondent No. 3) demanded payment of outstanding property tax (including arrears from 2008) totaling ₹1.23 crore, along with interest and penalty.

On 18.02.2018, the Bank of India filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Kolkata Bench ( “NCLT, Kolkata”) against M/s Enfield Apparels Ltd. seeking initiation of the Corporate Insolvency Resolution Process (CIRP), as the said company had defaulted in repayment of its debts amounting to Rs.42,40,76,787.43/-.

Respondent No. 3, vide four separate letters dated 18.11.2024, informed the Petitioners that the mutation would be processed only upon payment of outstanding property tax together with interest and penalty, including arrears pertaining to the erstwhile owner, M/s Enfield Apparels Ltd. A consolidated demand of Rs.1,23,84,142/- was raised, apportioned as follows: Rs. 24,48,118/- against Petitioner No. 1; Rs. 24,48,778/- against Petitioner No. 2; Rs. 24,48,118/- against Petitioner No. 3; and Rs. 50,48,128/- against Petitioners No. 4 and 5. This demand was for the

Mr. Jaydeep Kar, Senior Counsel appearing for the Petitioners, at the very outset, submits that the Petitioners do not dispute their liability to pay property tax from 19.01.2022 onwards, i.e., from the date when possession of the property was handed over to them. The dispute concerns only the period prior to 19.01.2022. Learned Senior Counsel further submits that the Petitioners are auction purchasers. Neither the e-auction sale notice nor the terms and conditions contained in the Expression of Interest (EOI) made any mention of outstanding property tax dues. No such liability was ever identified by the Official Liquidator or the Committee of Creditors of M/s Enfield Apparels Ltd

It is submitted that all claims against the corporate debtor in liquidation are required to be filed before the Liquidator under the provisions of the IBC, 2016. Once the assets are sold, it is the statutory duty of the Liquidator to distribute the sale proceeds among the creditors strictly in accordance with the statutory waterfall mechanism. Consequently, any liability towards outstanding municipal taxes up to the date of sale cannot be fastened upon the auction purchaser, who has bona fide acquired the property for valuable consideration. Such liability, if any, is required to be discharged by the Liquidator out of the sale proceeds realized from the auction.

The court observed that the EOI’s terms (Clauses 7.1.10, 9.7) unambiguously mandated independent due diligence and clarified that the reserve price excluded statutory dues. Relying on K.C. Ninan v. Kerala State Electricity Board (2023) 14 SCC 431 and Union of India v. Naskapara Jute Mills (1994) 1 SCC 575, it held that sales on "as is where is" basis transfer all encumbrances to purchasers. The court distinguished AI Champdany Industries Ltd. v. Official Liquidator (2009) 4 SCC 486, noting that Section 232 KMC Act creates a statutory charge—unlike the personal liability in Champdany.

All prospective auction-purchasers are put on notice of the liability to pay the pending dues when an appropriate "as-is-where-is" clause is incorporated in the auction-sale agreement. It is for the intending auctionpurchaser to satisfy themselves in all respects about circumstances such as title, encumbrances and pending statutory dues in respect of the property they propose to purchase. In a public auction-sale, auction-purchasers have the opportunity to inspect the premises and ascertain the facilities available, including whether electricity is supplied to the premises.

It was viewed that the Petitioner, being the auction purchaser of the premises in question, is liable to pay the outstanding property tax dues. The Official Liquidator through Sale Notice and EOI has made it very evident and clear that all the bidders are supposed to make their respective bids based on their own investigation and due diligence.

As observed by Supreme Court that when assets are sold on ‘as is where is basis’, the purchaser acquires them with full knowledge that they are being sold without any warranties, representations, or indemnities, and that the purchaser alone bears the responsibility of verifying the condition, liabilities, and encumbrances attached to the assets.

The court held that the statutory first charge under Section 232 KMC Act overrides the IBC’s general priority mechanism, and the petitioners’ failure to conduct due diligence despite explicit EOI warnings bound them to pre-existing tax liabilities. The Corporation’s refusal to mutate the properties under Section 183(5) KMC Act was lawful.

Relying on the judgment of the Supreme Court in K.C. Ninan, the court emphasized that "as is where is" sales transfer all rights, obligations, and liabilities to purchasers. It noted the petitioners had an alternative remedy to challenge the demand quantification before appellate authorities under the KMC Act.

It was viewed that “where a statutory first charge is created on the property, such as in respect of property tax under Section 232 of the Kolkata Municipal Corporation Act, 1980, the municipal authority is entitled to enforce such charge independently in accordance with the statutory mechanism provided therein. In such a situation, there is no inconsistency between the provisions of the IBC and the KMC Act, and, therefore, the overriding effect of Section 238 of the IBC is not attracted.”

The single bench of Justice Gaurang Kanth viewed that the Respondent Corporation acted squarely within its statutory mandate under Sections 183(5) and 232 of the Kolkata Municipal Corporation Act, 1980, and in consonance with the principles of statutory charges and municipal enforcement. The bench dismissed the writ petition.

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