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Crown debts do not take precedence over secured creditors

Crown debts do not take precedence over secured creditors

Calcutta High Court, a Single Judge Bench of the comprising of Justice Sabyasachi Bhattacharya in the case of Kolkata Municipal Corporation and Another v. Union of India and Others, REED 2021 Cal 01564, held that the proposition laid down in Principal Commissioner of Income Tax v. Monnet Ispat of Energy Limited, REED 2018 SC 08558, that income tax dues, being in the nature of crown debts do not take precedence over secured creditors, holds true in the present case as well. The claim of the KMC, being in the nature of crown debts, cannot gain precedence over other secured creditors, as contemplated in the IBC.

Facts of the Case

This case is in the matter of a writ petition filed by the Kolkata Municipal Corporation (KMC), which is a statutory body under the Kolkata Municipal Corporation Act, 1980 over a written order passed by the National Company Law Tribunal (NCLT), acting as adjudicating property under the Insolvency and Bankruptcy Code, 2016 (IBC) for handing over the physical possession of the office premises to the respondent which the Petitioner had distrained in the recovery of municipal tax dues from the assessee under sections 217 to 220 of the 1980 Act. 

Procedural History

The debt of the assessee came within the purview of the Corporate Insolvency Resolution Process (CIRP), thus prompting respondent No. 4 i.e., Resolution Professional, representing the owner, to approach the NCLT for handing over the physical possession of the property from the KMC back to the owner, which led to rising of the current writ petition.

Final Judgment and Reasoning

The counsel for the petitioner argued that KMC is a statutory authority as under the 1980 Act, and hence, took possession in the exercise of its statutory powers, which cannot be indicted by the NCLT within the scope of IBC. Placing reliance on Embassy Property Developments Private Limited v. State of Karnataka and Others, REED 2019 SC 12501, it was argued that the powers of NCLT as Adjudicating Authority are circumscribed by authority of Interim resolution professional according to section 18(f) of the IBC, the petitioner contended that 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 the court or authority, the petitioner being a statutory authority has this right, the exercise of power but the interim resolution professional has to be subject to such authority.

The counsel further argued the writ jurisdiction of this court can be invoked under Article 226 despite the availability of an alternative remedy since the question pertains to lack of Juridistiction and not its mere wrongful exercise by the NCLT.

The Counsel for Respondent No. 3 argued that the NCLT order passed on 17.01.2019 was passed upon commencement of the CIRP, the order dated 31.01.2020 pertaining to liquidation of the attachment to the corporate debtor was passed by the time CIRP failed and the liquidation commenced. The IBC has specified that financial or operational creditors can file petitions before the NCLT. According to Section 60(5)(c) of the IBC, any question of law or fact arising out of insolvency resolution and liquidation proceedings is decided by the NCLT. The counsel while stating this relied on the definition of “property” as given in Section 3(27) of the IBC.

The rights of the IRP to take control and custody of properties are not completely subject to determination of ownership by courts and authorities. In the case of Embassy Property, the IRP wanted an extension to a mining lease which was terminated by the government, whose both writ and application for extension were disposed of. Under paragraph 37 of this judgment, it indicated that a decision taken by a government or a statutory body within the realm of public law cannot be brought under the expression arising out of or in relation to the insolvency resolution. It is argued by the counsel that a distinction has to be drawn on the purpose of CIRP on its jurisdiction and likewise for NCLT. Adjudicatory jurisdiction or other courts or tribunals cannot be transgressed, in the current case, this falls within the jurisdiction of the NCLT. The petitioner in this case is an operational creditor. There is no primacy of statutory or crown debts. Respondent No. 3 prays for the writ petition to be dismissed.

The counsel for respondent No. 4 argues that there is no distinction between statutory and operational debts. He submits certain duties of resolution professional as defined under section 25(1) and section 25(2)(b) of the IBC. Section 36 of the IBC relied on that the current assets attached that are under liquidation are only those of the corporate debtor, as these have not been sold, the ownership still lies with the corporate debtor.

A resolution plan if received would be binding on the central government, state governments and local authorities as under section 31(1) of the IBC and as under Commissioner of Income Tax and others v. Chhabil Dass Agarwal, (2014) 1 SCC 603, the petitioner cannot argue that their debt which is of the nature of the crown debt, will take precedence over other debts. Section 238 of the IBC gives it an overriding effect over other laws.

After listening to all the contentions, the court dismissed the writ and decided that the finalized claim of KMC can very well be under the subject matter of IBC. The court reasoned that the lack of jurisdiction and wrongful exercise of jurisdiction is well within the purview of a writ under Article 226 of the constitution of India. Here only the grounds of absence of jurisdiction triggered the writ and not of wrongful exercise of jurisdiction. The duties of NCLT in the scope of authority were interpreted in two ways in terms of the phrase “one as an asset subject to determination of ownership by a court or authority”. The interpretation accepted was the power of the resolution professional to take control of ownership was subject to a court or authority. The question of a resolution professional’s authority did not arise here as the property was taken after the due procedure and due to “non-payment” of tax. The professional had the jurisdiction to take custody and control of the property. As laid down in the case of Principal Commissioner of Income Tax v. Monnet Ispat of Energy Limited, REED 2018 SC 08558, the crown debts do not take precedence over secured creditors.


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