BMC's Statutory First Charge Survives Liquidation Sale, Auction Purchaser Liable For Dues: NCLT Mumbai

The National Company Law Tribunal (NCLT), Mumbai has held that a statutory first charge created in favour of the Brihanmumbai Municipal Corporation (BMC) over a property for outstanding property tax dues is not extinguished by a liquidation sale.

The charge can be enforced against the auction purchaser.

The tribunal clarified that participation in the liquidation process does not extinguish the statutory charge or prevent the Municipal Authority from enforcing it against the property.

A coram of Judicial Member Vinay Goel and Technical Member Charanjeet Singh Gulati held that the property was sold on an “as is where is” basis and therefore the liabilities attached to it were to be borne by the auction purchaser, Indojewel Jewellery Pvt Ltd.

"Applying the aforesaid principle to the facts of the present case, Section 212 of the Mumbai Municipal Corporation Act, 1888, creates a statutory first charge in favour of the Municipal Authority in respect of its outstanding dues. Once such a charge comes into existence, the Municipal Authority is entitled to enforce the same against the property, notwithstanding that it had also lodged its claim before the Liquidator. Accordingly, the mere fact that Respondent No. 1 participated in the Liquidation process does not result in extinguishment of the statutory charge created under Section 212 of the Mumbai Municipal Corporation Act, 1888, nor does it preclude the Municipal Authority from seeking enforcement of the charge against the property."

The case arose after Panache Exports Pvt Ltd was admitted into insolvency on November 25, 2019 and ordered into liquidation on September 23, 2022. Indojewel purchased a Special Economic Processing Zone (SEEPZ) unit of the Corporate Debtor through e-auction on July 5, 2023 for ₹5.31 crore and paid the entire sale consideration.

Brihanmumbai Muicipal Corporation claimed ₹86.58 lakh towards outstanding dues. Indojewel argued that the dues related to the pre liquidation period and that BMC had already lodged its claim in the liquidation proceedings.

The Auction Notice dated June 5, 2023, and the Certificate of Sale dated August 16, 2023, stated that the property was sold on “as is where is, as is what is, whatever there is, and no recourse basis.” Indojewel argued that despite this, the pre-liquidation dues could not be recovered from it after the sale.

The Tribunal disagreed with Indojewel's contentions.

The Tribunal held that if the property was purchased on such an “as is where is” basis, Indojewel was expected to conduct due diligence before bidding and could not subsequently claim ignorance of liabilities attached to the property.

"Upon perusal of the Letter of Intent dated 07.07.2023 and the Sale Certificate dated 16.08.2023, it is evident that the said property was sold on an “as is where is” basis. Admittedly, Respondent No. 1 had submitted its claim to Respondent No. 2, and the outstanding dues and liabilities attached to the property were reflected in the List of Stakeholders dated 26.07.2023. Accordingly, the Applicant was required to undertake its own due diligence prior to purchasing the said property."

The Tribunal further noted that BMC's claim and the outstanding liabilities were reflected in the List of Stakeholders dated July 26, 2023, requiring the applicant to undertake due diligence before purchasing the property.

It also held that Section 32A(2) of the Insolvency and Bankruptcy Code provides immunity concerning actions against the Corporate Debtor's property relating to prior offences. The Tribunal therefore said that such immunity does not extend to ordinary outstanding statutory charges or dues.

Accordingly, the Tribunal held that BMC's statutory first charge survived the liquidation sale and that Indojewel was liable to pay the statutory dues, dismissing the application

For Applicant: Advocate Manoj Kumar Mishra i/b Mishra Legals