HC dismisses Kolkata Municipal Corporation plea challenging IRP’s control over attached property

Can a property having been seized by a government agency in recovery of its statutory claims against the corporate debtor be the subject-matter of a corporate resolution process under the Insolvency and Bankruptcy Code (IBC)? The Calcutta High Court hearing a write petition filed by Kolkata Municipal Corporation (KMC) has said that the ‘finalized’ claim of the KMC can very well be the subject-matter of a resolution process under the IBC.

The High Court maintained that after KMC had taken possession of a disputed property for non-payment of tax, there was no further scope for any “determination” of ownership of the property by the KMC, and as such, there arose no question of the task of the interim resolution professional, in taking control and custody of the asset, being subject to the determination of ownership by any authority, as contemplated under Section 18(f)(vi) of the IBC.

The Calcutta High Court says that the claim of the KMC, in the absence of any successful challenge thereto, attained finality, fastening a liability upon the corporate debtor.

Facts of the case, petitioner’s argument

Kolkata Municipal Corporation had filed a writ petition in the high court challenging an 17 December 2019 order passed by the National Company Law Tribunal (NCLT) for handing over physical possession of the office premises of a corporate debtor to the interim resolution professional.

The counsel of the petitioner argued that Kolkata Municipal Corporation, which is a statutory authority, took possession of the asset in exercise of its statutory powers, and such independent statutory exercise cannot be prohibited by the NCLT within the scope of the IBC.

The petitioner cited the Supreme Court judgement in the Embassy Property Developments Pvt. Ltd. vs. State of Karnataka and others case to further its argument. The Supreme Court in its order in that case had note that the powers of the NCLT, as Adjudicating Authority under Section 60 of the IBC, are circumscribed by the authority of the interim resolution professional, as contemplated in Section 18(f) of the IBC. In terms of Clause f(vi) of Section 18(1) of the IBC, it is contended by the petitioner, the control and custody of any asset to be taken by the interim resolution professional has to be subject to the determination of ownership by a court or authority.

The petitioner, therefore, argued that since it is a statutory authority, the determination of ownership, by virtue of taking possession and subsequent attachment and sale of the property, falls within the exclusive domain of it. The exercise of power by the interim resolution professional has to be subject to such authority, it argued.

The High Court used the same SC order in the Embassy Property Developments Pvt. Ltd. vs. State of Karnataka and others against the petitioners challenge. It quoted that part of the order where it was held that “it will be a different matter if proceedings under statutes like Income Tax Act had attained finality, fastening a liability upon the corporate debtor, since, in such cases, the dues payable to the Government would come within the meaning of the expression “operational debt” under Section 5(21), making the Government an operational creditor in terms of Section 5(20). The moment the dues to the Government are crystallised and what remains is only payment, the claim of the Government will have to be adjudicated and paid only in a manner prescribed in the resolution plan as approved by the Adjudicating Authority, namely the NCLT.

The High Court said that in the present case, the Kolkata Municipal Corporation took possession of the disputed property for non-payment of tax, and thus, there was no further scope for any “determination” of ownership of the property by the KMC.

It, therefore, dismissed KMC’s writ petition by saying that as per the interpretation in Embassy Property case, such a finalized claim would come within the purview of operational debt under Section 5(21) of the IBC. Hence, the Resolution Professional has jurisdiction to take custody and control of the same.

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