Contractual Clauses Like ‘As Is Where Is’ and ‘Whatever There Is’ Can’t Preserve Municipal Charge Which Stands Extinguished U/S.53 & 238 Of IBC: Calcutta High Court

The High Court was considering a writ petition involving the proposed revaluation of the property and the amount of commensurate outstanding tax claimed by the respondent/KMC for a period before the purchase of the property by the writ petitioners, with respect to an office space.

The Single Bench of Justice Rai Chattopadhyay held, “The issue is that can the contractual clause override protection under the IBC 2016. IBC having a non-obstante clause, municipal dues even if there is any, stands extinguished under the IBC, the contractual clause cannot revive the same. In the present factual matrix, no quantified arrear demand existed at sale, the respondent did not lodge any claim before the liquidator, but retrospective revaluation was initiated at a later stage post completion of liquidation sale. Thus, there were no crystalized encumbrances to pass on to the new purchasers/writ petitioners under the contractual clauses “as is where is” and “whatever there is”. Any municipal due under the statute does not survive as an independently enforceable right outside the IBC mechanism, when the concerned property has been dealt with under the insolvency law. Contractual clauses like “as is where is” and “whatever there is” cannot elevate or preserve a municipal charge which stands subordinated or extinguished under sections 53 and 238 IBC.”

Advocate Arindam Banerjee represented the Petitioner while Advocate Biswajit Mukherjee represented the Respondent.

Factual Background

The National Company Law Tribunal, Kolkata Bench (NCLT, Kolkata Bench) vide an order dated October 17, 2018, in a Company Petition involving Nicco Corporation Limited, directed liquidation of the said company in accordance with the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC 2016). The liquidator issued an invitation for Expressions of Interest for the sale of premises namely, Nicco House, on the basis of the reserved price. The bid submitted by the consortium consisted of 10 members, including the present petitioners. The consortium stood as the highest bidder out of which the petitioners had jointly purchased an area measuring 3430 sq. ft. on the 2nd floor of the building together with two car parking spaces and an undivided proportionate share in the land. The petitioners paid a consideration money to the tune of Rs. 2,54,63,500 and the Liquidator executed a registered deed of conveyance in their favour on September 26, 2019, transferring the right, title and interest

A notice dated July 28, 2022, under Sections 184 and 185 of the Kolkata Municipal Corporation Act, 1980, for determining the annual valuation related to the assessment of property tax came to be issued, whereby the respondent Corporation intended to make the revaluation of the property effective for certain periods. By challenging the impugned notices, the writ petition was filed by the petitioners with the prayer that the notice be set aside and the respondent should act in accordance with law, so far as re-valuation of the property purchased by the petitioners and imposition of tax was concerned.

Reasoning

On a perusal of the facts of the case, the Bench noted that the property was owned by the company in liquidation and the writ petitioners were the purchasers thereof for valuable consideration, through auction. The deed of conveyance was executed on September 26, 2019, and the respondent/Corporation had not lodged any claim as regards the property tax due, with respect to the said property, for the period as mentioned in the notice dated July 28, 2022, before the Liquidator.

The Bench explained that once liquidation is ordered under the Insolvency and Bankruptcy Code, 2016, the process must strictly follow the Code and the Regulations framed thereunder, reinforcing that the Insolvency and Bankruptcy Code, 2016, is a complete and exhaustive Code on the subject. “The overriding effect of the Code is all pervasive, throughout all the existing statutes, including municipal laws under which property tax or other local dues are claimed. Once liquidation proceedings are initiated under the Insolvency and Bankruptcy Code, 2016 claims of municipal authority must be dealt with strictly in accordance with the Code, particularly the priority mechanism prescribed under Section 53 of the Code”, it stated.

The Bench also held that once a resolution plan is approved by the NCLT, all prior claims, debts and liabilities of the corporate debtor are extinguished, and creditors must adhere to the ‘waterfall mechanism’ under Section 53 of the Insolvency and Bankruptcy Code for asset distribution. Auction purchasers and Successful Resolution Applicants (SRAs) are not liable for past dues or liabilities incurred before the sale or resolution plan approval, it noted.

Coming to the facts of the case, the Bench noticed that no quantified arrear demand existed at the sale, the respondent did not lodge any claim before the liquidator, but retrospective revaluation was initiated at a later stage, post completion of the liquidation sale. According to the Bench, there were no crystallised encumbrances to pass on to the new purchasers/writ petitioners under the contractual clauses “as is where is” and “whatever there is”.

As per the Bench, the petitioners could not be held responsible for payment of any tax with respect to the property, for a period when they had been only strangers to the same that too, since the original owner Company being in liquidation and the petitioners being purchasers of the property, the tax amount due for the previous period if any, could only be recovered through the process as prescribed under the Insolvency and Bankruptcy Code, 2016 and not otherwise.

Thus, allowing the writ petition, the Bench set aside the notice issued under Sections 184 and 185 of the Kolkata Municipal Corporation Act, 1980, the consequential assessment order and the property tax bill for 2024–2025 issued to the petitioners insofar as they sought to impose liability upon the petitioners for any period before September 26, 2019.

Cause Title: Mamta Binani & Anr. Vs. Kolkata Municipal Corporation (Case No.: WPO 2435 of 2022)

Appearance

Petitioner: Advocates Arindam Banerjee, Danish T

Respondent: Advocates Biswajit Mukherjee, Gopal Chandra Das, Manisha Nath

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