NCLAT holds Kolkata Municipal Corporation as secured creditor in Talwalkars liquidation case

The National Company Law Appellate Tribunal (NCLAT) at New Delhi has held that the Kolkata Municipal Corporation (KMC) is a secured creditor in the liquidation proceedings of Talwalkars Better Value Fitness by virtue of the statutory charge created under Section 232 of the Kolkata Municipal Corporation Act, 1980 [Kolkata Municipal Corporation v. Liquidator of Talwalkars Fitness]

A coram of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) modified the National Company Law Tribunal (NCLT) Mumbai’s July 19, 2024 order:

“In view of the law laid down by the Hon’ble Supreme Court in above cases, appellant has a statutory charge by virtue of Section 2(32) of the Kolkata Municipal Corporation Act and the appellant is a secured creditor,” the NCLAT ruled.

KMC had assessed property tax dues on an asset of the corporate debtor located within its municipal limits.

While part payment was made in 2018, ₹30.28 lakh remained outstanding, leading to issuance of a distress warrant.

After Talwalkars Better Value Fitness Ltd. entered corporate insolvency on January 11, 2021, KMC raised a demand for the unpaid taxes and subsequently filed a claim of ₹51.72 lakh before the liquidator.

The liquidator admitted only ₹34.23 lakh and classified KMC as an unsecured operational creditor. Aggrieved, the Corporation moved the NCLT under Section 42 of the Insolvency and Bankruptcy Code (IBC).

The NCLT partly allowed the appeal but rejected KMC’s plea to be treated as a secured creditor.

This led to the appeal before NCLAT.

KMC contended before the NCLAT that Section 232 of the 1980 Act creates a first charge on the land or building for unpaid property tax, making it a secured creditor under the IBC.

It relied on Supreme Court rulings in State Tax Officer v. Rainbow Papers Ltd., KC Ninan v. Kerala State Electricity Board and Greater Noida Industrial Development Authority v. Prabhjit Singh Soni (2023), all of which recognized statutory dues backed by a legislated charge as secured debts.

KMC argued that its dues cannot be treated as “crown debts” or government dues since a municipal corporation is a statutory local authority and not the State itself.

The NCLAT held that even in the absence of an express non obstante clause, a statutory charge created by operation of law can confer the status of a secured creditor.

It also drew from the reasoning in Pashchimanchal Vidyut, wherein the Supreme Court had distinguished between government dues and debts owed to statutory corporations.

As noted by the NCLAT:

“The Hon’ble Supreme Court has clearly noticed the distinction between the Government dues and dues payable to the operational creditor. … Dues payable to statutory corporations which have distinct juristic entity but whose dues do not constitute Government dues payable or those payable into the respective Consolidated Funds stand on a different footing."

Therefore, the Bench concluded that KMC’s dues “cannot be held to be Government dues” and must be treated as a secured operational debt under the Insolvency and Bankruptcy Code.

The appellant, Kolkata Municipal Corporation, was represented by advocates Astha Sharma (Partner), Piyush Agarwal (Partner), Anju Thomas (Associate Partner), Kritika Sethi (Principal Associate) and Pratibha Yadav (Associate) of AQUILAW.

The respondent, Liquidator Gajesh Labhchand Jain, was represented by Advocates Mohit Rohatgi, Ashwini Kumar Tak, Aditi Nemakal and Karan Trehan.

[Read Judgment]