Statutory First Charge under Municipal Act Qualifies as Security Interest under IBC, Holds NCLAT
- REEDLAW
- 3 hours ago
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REEDLAW Legal News Network reports: In a landmark decision, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, ruled that a statutory first charge created under Section 232 of the Municipal Act constitutes a valid “security interest” within the meaning of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal clarified that such a charge entitles the municipal authority to be treated as a secured operational creditor in liquidation proceedings, thereby ensuring that statutory dues backed by a legislated charge receive secured status in insolvency distribution.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while adjudicating a company appeal, held that a statutory first charge created under Section 232 of the Municipal Act constitutes a valid security interest under the Insolvency and Bankruptcy Code, 2016. Consequently, the municipal authority was entitled to be treated as a secured operational creditor in the liquidation process of the corporate debtor, ensuring that the municipality’s claim is accorded appropriate priority in distribution as per the IBC framework.
The Appellant, a municipal authority, had filed an appeal before the Appellate Tribunal challenging the order of the Adjudicating Authority, which had partly allowed the appeal to the limited extent of admitting a reduced claim amount and had refused to recognise the Appellant as a secured creditor in the liquidation process of the Corporate Debtor. The property of the Corporate Debtor situated within the jurisdiction of the Appellant had been assessed for property tax, a portion of which remained unpaid. After the initiation of the Corporate Insolvency Resolution Process (CIRP) and subsequent liquidation of the Corporate Debtor, the Appellant filed its claim for outstanding property tax dues, which the Liquidator categorised as that of an unsecured operational creditor.
The Adjudicating Authority, relying on a decision of the Calcutta High Court, held that the Appellant’s claim constituted a “crown debt” and not a secured debt. The Appellant contended that under Section 232 of the Municipal Act, the outstanding property tax created a statutory first charge upon the property of the Corporate Debtor, thereby rendering it a secured debt under Section 3(30) of the Insolvency and Bankruptcy Code, 2016. It was further argued that the Adjudicating Authority erred in disregarding the binding precedent of the Supreme Court in State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519, which recognised the creation of a statutory charge as a security interest. The Appellant also placed reliance on the decisions in K.C. Ninan v. Kerala State Electricity Board & Ors., REEDLAW 2023 SC 05648, and Greater Noida Industrial Development Authority v. Prabhjit Singh Soni and Another, REEDLAW 2024 SC 02527, to support its contention that statutory provisions can create a valid security interest by operation of law.
The Respondent, on the other hand, contended that the dues of the Appellant were in the nature of government dues and thus could not be treated as a secured debt. It was submitted that the municipal body, being a statutory authority exercising sovereign power to levy taxes, could not claim a status superior to that of the Government. The Respondent relied on the judgment of the Supreme Court in Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited and Others, REEDLAW 2023 SC 07609, to assert that the absence of a non-obstante clause in Section 232 distinguished the present case from Rainbow Papers.
Upon consideration, the Appellate Tribunal examined whether the statutory charge under Section 232 of the Municipal Act conferred upon the Appellant the status of a secured creditor. The Tribunal referred to the judgments in State Tax Officer (1) v. Rainbow Papers Limited, REEDLAW 2022 SC 09519 and K.C. Ninan v. Kerala State Electricity Board & Ors., REEDLAW 2023 SC 05648 to reaffirm that a statutory charge created by law or by valid subordinate legislation could constitute a “security interest” under the Code. It was also noted that dues payable to statutory corporations are distinct from “Government dues” within the meaning of Section 53(1)(e) of the IBC, as clarified in Paschimanchal Vidyut Vitran Nigam Limited v. Raman Ispat Private Limited and Others, REEDLAW 2023 SC 07609. The Tribunal observed that such statutory bodies, though exercising delegated authority, are distinct juristic entities and may be classified as operational or secured creditors depending on the nature of the underlying statute.
The Appellate Tribunal concluded that the Adjudicating Authority erred in holding the Appellant’s dues as mere “Government dues”. The statutory first charge created under Section 232 of the Municipal Act constituted a valid security interest by operation of law, thereby rendering the Appellant a secured operational creditor of the Corporate Debtor in the liquidation proceedings.
Ms. Anju Thomas, Ms. Pratibha Yadav, Ms. Astha Sharma, Ms. Kritika Sethia and Mr. Piyush Agarwal, Advocates, represented the Appellant.
For the Respondent/ Defendant: Mr. Mohit Rohatgi, Mr. Ashwini Kumar Tak, Ms. Aditi Nemakal and Mr. Karan Trehan, Advocates, appeared for the respondent.
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