Municipal Dues Cannot Be Recovered From Auction Purchaser After IBC Liquidation: Calcutta High Court

The Calcutta High Court has held that once liquidation proceedings commence under the Insolvency and Bankruptcy Code, municipal dues must be dealt with strictly within the framework of the Code and cannot be enforced independently against auction purchasers through contractual clauses such as “as is where is” or “whatever there is."

Such clauses generally mean that a buyer takes the property in its existing physical and legal condition, along with all visible defects, risks, and liabilities attached to it, and without any warranty from the seller. However, the Court clarified that these contractual terms cannot override the statutory scheme of the IBC.

Justice Rai Chattopadhyay examined whether the Kolkata Municipal Corporation could retrospectively revalue a property and levy tax for periods prior to its purchase in liquidation proceedings.

“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. Any municipal due under the statute does not survive as an independently enforceable right outside the IBC mechanism,” the Court observed.

The writ petition was filed by Mamta Binani and another, who had purchased 3,430 sq. ft. office space along with two car parking spaces at premises in Kolkata through an e-auction conducted by the liquidator of Nicco Corporation Limited. The National Company Law Tribunal, Kolkata, had ordered liquidation of the company on October 17, 2018.

On July 28, 2022, the Corporation issued a notice under the Kolkata Municipal Corporation Act proposing retrospective revaluation of the property from as far back as the first quarter of 2005 to 2006 and raising consequential tax demands. An assessment order followed on August 23, 2022.

The petitioners contended that the corporation, being an operational creditor, ought to have lodged its claim before the liquidator in accordance with the IBC. They argued that no quantified arrears existed at the time of sale, nor had any claim been filed in the liquidation process.

Accepting the petitioners' case, the Court held that Section 238 gives the IBC overriding effect over inconsistent municipal law. As no claim had been lodged in liquidation and no demand had crystallised before the sale, no enforceable encumbrance could pass to the auction purchasers.

It therefore set aside the notice and assessment to the extent they imposed liability for any period prior to September 26, 2019, holding that any pre-liquidation municipal dues could be recovered only under the IBC framework.