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Issues: (i) Whether municipal property-tax dues relating to the period prior to the petitioners' purchase could be retrospectively assessed and enforced against them. (ii) Whether, after liquidation under the Insolvency and Bankruptcy Code, 2016, municipal dues had to be lodged and realised only through the liquidation process. (iii) Whether the auction-sale conditions could fasten pre-existing municipal liabilities on the petitioners as purchasers.
Issue (i): Whether municipal property-tax dues relating to the period prior to the petitioners' purchase could be retrospectively assessed and enforced against them.
Analysis: The property had gone into liquidation before the petitioners purchased it. The municipal authority had not crystallised or lodged the claimed dues with the liquidator for the relevant earlier period. The Court held that the petitioners, being strangers to the property for the prior period, could not be saddled with liability for a time when they were not owners, and any pre-liquidation claim had to follow the insolvency framework rather than a fresh retrospective levy against the purchasers.
Conclusion: The retrospective municipal demand for periods prior to 26 September 2019 was unsustainable against the petitioners.
Issue (ii): Whether, after liquidation under the Insolvency and Bankruptcy Code, 2016, municipal dues had to be lodged and realised only through the liquidation process.
Analysis: The Court applied the overriding effect of the Insolvency and Bankruptcy Code, 2016 and treated municipal property-tax dues as operational debt. It held that once liquidation commences, statutory and municipal claims must be asserted before the liquidator and dealt with under the statutory priority framework. Independent recovery under municipal law outside the Code was impermissible where no claim had been lodged in the liquidation process.
Conclusion: Pre-liquidation municipal dues could be enforced only in accordance with the Insolvency and Bankruptcy Code, 2016, particularly the liquidation and priority scheme.
Issue (iii): Whether the auction-sale conditions could fasten pre-existing municipal liabilities on the petitioners as purchasers.
Analysis: The sale terms on an "as is where is" and "whatever there is" basis did not override the statutory scheme under the Insolvency and Bankruptcy Code, 2016. In the absence of any quantified arrear demand existing against the petitioners at the time of transfer, and in the absence of a claim lodged before the liquidator, the contractual clause could not revive or preserve an otherwise unenforceable municipal demand against the auction purchasers.
Conclusion: The sale conditions did not make the petitioners liable for pre-liquidation municipal dues.
Final Conclusion: The impugned notice, assessment and tax bill were set aside to the extent they sought to burden the petitioners with dues for the period before transfer, while the municipal authority was left free to assess and recover tax only from the date of title transfer in accordance with law.
Ratio Decidendi: In liquidation, municipal dues are subject to the Insolvency and Bankruptcy Code, 2016 and cannot be independently enforced against an auction purchaser for the pre-transfer period unless duly asserted in the liquidation process and dealt with under the statutory priority framework.
Municipal tax dues in liquidation cannot be enforced against auction purchasers for the pre-transfer period outside the insolvency process.
Municipal property-tax dues for the pre-transfer period could not be retrospectively enforced against auction purchasers who were strangers to the property during that time, and the demand for periods before transfer was unsustainable. Once liquidation under the Insolvency and Bankruptcy Code, 2016 had commenced, municipal claims had to be lodged with the liquidator and dealt with under the statutory priority framework; independent recovery outside the Code was impermissible where no claim had been filed. "As is where is" sale terms did not override that statutory scheme or fasten pre-existing liabilities on the purchasers. The impugned notice, assessment and tax bill were set aside to that extent.
Overriding effect of the Insolvency and Bankruptcy Code, 2016 - waterfall mechanism under the Insolvency and Bankruptcy Code, 2016 - clean slate doctrine in insolvency and liquidation - operational debt includes municipal/statutory dues - auction purchaser immunity from pre sale statutory liabilities in liquidation - requirement to lodge claims with the liquidator for participation in liquidation distribution - municipal authority cannot independently enforce pre liquidation dues outside IBC process - retrospective revaluation and assessment not enforceable against purchaser for pre purchase periods - Overriding effect of the Insolvency and Bankruptcy Code, 2016 - HELD THAT:- Indian Courts and Tribunals have consistently recognized the supremacy of the Insolvency and Bankruptcy Code, 2016 in matters of insolvency and liquidation. It has been held that Insolvency and Bankruptcy Code, 2016 is a special law with a non-obstante clause and, therefore, prevails over general laws in case of inconsistency. It is now well-settled 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 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. The overreaching principle across all the judgments as relied on by the writ petitioners, is the supremacy of Insolvency and Bankruptcy Code, 2016 and the ‘clean slate theory’. 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, 2016 for asset distribution. Auction purchasers and Successful Resolution Applicants (SRAs) are not liable for past dues or liabilities incurring before the sale or resolution plan approval. Therefore, in the liquidation of company, the Insolvency and Bankruptcy Code, 2016 has an overriding effect over municipal laws, under which property tax is claimed. Municipal dues are treated as operational debts and must be submitted to the liquidator and satisfied strictly, in accordance with Section 53 of the Insolvency and Bankruptcy Code, 2016, as it is held by the NCLAT – New Delhi in Bhatpara Municipality case [2021 (11) TMI 791 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, PRINCIPAL BENCH, NEW DELHI]. Any priority, charge or recovery mechanism provided under the municipal legislation stands overridden by virtue of Section 238 of the Insolvency and Bankruptcy Code, 2016. Contractual clause override protection under the IBC 2016 - HELD THAT:- 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. In liquidation, there is no resolution plan. Therefore section 31 IBC does not operate. Instead, section 53 IBC governs the distribution. The clean slate doctrine in liquidation does not flow from section 31 IBC, it must be derived differently. The key statutory provisions are under section 33 IBC which provides for liquidation order, section 35 IBC which provides for powers of liquidator, section 52 IBC which enumerates secured creditors’ rights, the waterfall principle as provided under section 53 IBC and the overriding clause as per section 238 IBC. If a municipal law creates a “first charge” on property, liquidation does not automatically wipe it out, but it depends on characterization and participation. Under IBC a “secured creditor” is one in whose favour a “security interest” is created. A statutory “first charge” may qualify as a “security interest” due to operation of law and render the authority as the “secured creditor”. All these are subject to furnishing claim by the statutory authority before the liquidator without which its claim may not participate in distribution. Not furnishing a claim before the Liquidator risks the authority losing its rights of enforcement and the authority cannot continue independent recovery proceeding. The settled principle of law is to apply clean slate approach in liquidation in the context of provisions under sections 238 and 53 IBC and not as per section 31 (in case of resolution plan). It is evident in this case that on either of these dates there were no proposed/declared and/or claimed tax which has remained unpaid and due, so far as the said asset is concerned. Hence, also there is no question of any direct or constructive knowledge of the petitioners regarding any due tax, to be existing on the said relevant date/s. It is necessary to mention here that the respondent authority has never filed any claim of it with respect to the concerned property, before the learned liquidator, in the resolution process, for the period as mentioned in the notice dated July 28, 2022. The petitioners cannot be held responsible for payment of any tax with respect to the property, for a period when they have 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. It has been found that the impugned notice dated July 28, 2022 of the respondent and its order of assessment dated August 23, 2022 and the property tax bill for 2024-25 issued to the writ petitioners are not legally sustainable. The respondent authority has unauthorisedly and illegally issued the same and those are liable to be set aside. In view thereof the Court finds it unnecessary to discuss in detail the other points argued by the petitioners, challenging these as mentioned above. The writ petition should succeed.