2025 (9) TMI 1641 - AT - IBC

Appeal allows appellant to be declared secured creditor based on statutory charge treating government dues as secured debt

Kolkata Municipal Corporation Versus Gajesh Labhchand Jain, Liquidator of Talwalkars Better Value Fitness Ltd.

NCLAT (PB), New Delhi allowed the appeal, modified the adjudicating authority's order dated 19.07.2024, and declared the appellant a secured creditor of ... Appellant is secured creditor of the corporate debtor by virtue of Section 232 of the Kolkata Municipal Corporation Act, 1980 or not - dues of the appellant are Government dues - HELD THAT:- Reliance has been placed on the judgment of the Hon’ble Supreme Court in Rainbow Papers Ltd. [2022 (9) TMI 317 - SUPREME COURT], in which judgment, Hon’ble Supreme Court relying on Section 48 of Gujarat Value Added Tax Act, 2003 has held that State Tax Officer shall by statutory charge holder. In Rainbow Papers Ltd. the claim of the State Tax Officer was being a secured creditor of the corporate debtor was not accepted by the NCLT & NCLAT against which order, appeal was filed in the Hon’ble Supreme Court. Hon’ble Supreme Court in Rainbow Papers Ltd. relying on Section 48 has held that the claim of State Tax Officer was a secured debt and State Tax Officer was secured creditor. Judgment of the Hon’ble Supreme Court in the matter of Greater Noida Industrial Development Authority Vs. Prabhjit Singh Soni & Anr. [2024 (2) TMI 681 - SUPREME COURT (LB)] relying on Section 13A of the U.P. Industrial Area Developmental Act, 1976 has held that Greater Noida shall be secured creditor by virtue of Section 13A of U.P. Industrial Development Act, 1976. The judgment of the Hon’ble Supreme Court in Greater Noida Industrial Development Authority also supports the submission of the appellant that appellant is a secured creditor. Hon’ble Supreme Court in Pashchimanchal Vidyut Vitran Nigam [2023 (7) TMI 831 - SUPREME COURT] has noticed the difference between the Government dues and dues payable to the statutory corporations. The Hon’ble Supreme Court has clearly noticed the distinction between the Government dues and dues payable to the operational creditor. The impugned order passed by the adjudicating authority dated 19.07.2024 is modified. The Prayer of the appellant as made to declare it as secured creditor is allowed. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether a statutory charge created by Section 232 of the municipal corporation Act operates to make the municipal dues a secured debt under the Insolvency and Bankruptcy Code (IBC), thereby rendering the municipal authority a secured creditor. 2. Whether property tax/municipal dues collectible by a municipal corporation constitute 'government dues' or 'crown debts' that are categorically distinct from secured or operational creditors for the purposes of the IBC waterfall. 3. The applicability and effect of recent Supreme Court pronouncements on statutory charges and the classification of government/municipal dues under IBC, and whether earlier High Court observations to the contrary govern the present adjudication. ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether Section 232 creates a statutory charge making municipal dues a secured debt under IBC Legal framework: Section 232 provides that property tax on lands and buildings due from any person shall, subject to prior payment of land revenue due to the Government, be a first charge upon such land or building and upon movable property found within. IBC defines 'secured creditor' as a creditor in favour of whom security interest is created, and security interest may arise by operation of law. Precedent Treatment: The Court considered and followed Supreme Court authorities recognizing that statutory provisions or subordinate regulations can create enforceable charges (K.C. Ninan; Paschimanchal Vidyut Vitran Nigam Ltd.; Greater Noida Industrial Development Authority; Rainbow Papers Ltd.). Those decisions acknowledge that statutory/regulatory charging mechanisms can render certain public dues secured debts under IBC. Interpretation and reasoning: The Court reasoned that Section 232 is a statutory provision expressly creating a first charge on specified property for property tax. Such a statutory charge falls within the definition of security interest under IBC and thereby converts municipal dues secured by Section 232 into secured debts. The Court treated the statutory nature and wording of Section 232 as sufficient to create a charge attaching to the asset, analogous to statutory charges upheld in the cited Supreme Court decisions. Ratio vs. Obiter: Ratio - A statutory provision expressly creating a charge (here Section 232) creates a security interest by operation of law, making the collecting municipal body a secured creditor under IBC; subordinate jurisprudence supporting creation of charge by regulations informs but does not limit this ratio. Conclusion: The municipal dues secured by Section 232 constitute a statutory charge and the municipal authority is a secured creditor. The adjudicating authority erred in rejecting that classification. Issue 2: Whether municipal property tax dues are 'government dues' / crown debts excluded or subordinated under IBC Legal framework: IBC's waterfall distinguishes amounts due to Central and State Governments (and amounts payable into Consolidated Funds) and treats certain 'government dues' lower in priority; Section 53 enumerates classes. The conceptual distinction between amounts payable to governments (treasury/consolidated funds) and dues payable to statutory/local authorities/statutory corporations is material. Precedent Treatment: The Court relied on Paschimanchal (which distinguishes dues payable to statutory corporations/local authorities from Central/State government dues) and on other Supreme Court decisions (including Dum Dum Municipality discussion in Paschimanchal) emphasizing that statutory corporations/local authorities can be distinct juristic entities and their dues need not equate to government dues payable into Consolidated Funds. The Rainbow Papers decision recognizing State tax as secured creditor under a statutory charge was also applied. Interpretation and reasoning: The Court accepted the distinction that not all statutory dues are 'government dues' for IBC priority purposes. Where statutory charges do not require crediting into a Consolidated Fund or are dues of separate juristic local/statutory entities and are backed by a statutory charge on property, such dues may be treated as secured operational/secured creditor claims rather than crown debts. The Court held that municipal property tax secured by Section 232 stands on that footing and is not automatically a government/crown debt that must be relegated in priority. Ratio vs. Obiter: Ratio - Dues of statutory/local authorities secured by express statutory charge are not automatically 'government dues' in the IBC priority sense; they may qualify as secured creditor claims depending on the statutory scheme. Obiter - discussion of Article 265 and general constitutional fiscal principles as background. Conclusion: The municipal dues in question are not to be treated as crown/government debts solely by virtue of sovereign character of tax collection; they qualify as secured debts under Section 232 and must be treated accordingly in liquidation. Issue 3: Application of and relationship between competing authorities (Rainbow Papers, Paschimanchal, K.C. Ninan, Greater Noida, Kolkata High Court decision) Legal framework: Courts must harmonize Supreme Court precedents governing statutory charges, secured creditor status under IBC, and the classification of government/statutory dues; High Court observations are subordinate and fact-specific. Precedent Treatment: The Court treated Supreme Court authorities (Rainbow Papers, Paschimanchal, K.C. Ninan, Greater Noida) as binding and controlling. The Calcutta High Court decision that had characterized similar municipal restraint as crown debt was examined and distinguished: that High Court addressed only limited questions (jurisdiction and effect of seizure on RP possession) and did not decide the categorical nature of the municipal claim within the IBC waterfall; its observations were not dispositive on secured creditor status. Interpretation and reasoning: The Court held itself bound by the Supreme Court pronouncements which endorse that statutory provisions or subordinate regulations can create charges converting certain public dues into secured claims under IBC (K.C. Ninan; Paschimanchal; Greater Noida; Rainbow Papers). The Calcutta High Court's conclusions on seizure and operational control were of narrower scope and did not determine whether the municipal authority is a secured creditor; accordingly, that decision could not override Supreme Court authority or the statutory import of Section 232. Ratio vs. Obiter: Ratio - Supreme Court rulings establishing that statutory charges/regulations can create security interests and that dues of statutory/local bodies may be distinct from 'government dues' are followed as binding law. Obiter - characterization of prior High Court remarks as not dispositive because different issues and limited scope. Conclusion: Supreme Court precedents control and support classification of municipal dues secured under Section 232 as secured creditor claims; the narrower High Court observations relied upon by the adjudicating authority do not negate that conclusion. Relief and practical consequence Legal framework & Reasoning: Given the statutory charge and binding precedents, a claim properly admitted by the liquidator in amount admitted must be treated as that of a secured creditor and dealt with by the liquidator in accordance with law and the IBC waterfall applicable to secured debts. Conclusion: The adjudicating authority's order rejecting secured creditor status was modified; the municipal authority's claim, as admitted by the liquidator, shall be treated and dealt with as a secured creditor claim in liquidation. The appeal is allowed to that extent.