Determination of ownership when power of control and custody is to be exercised by a Resolution Professional.

Determination of ownership when power of control and custody is to be exercised by a Resolution Professional.

- The law as laid down in Kolkata Municipal Corporation vs. Union of India

The High Court at Calcutta in Kolkata Municipal Corporation vs. Union of India (WPA 977 of 2020) in its judgment dated 29th January, 2021 decided on the law relating to attachment of asset by an Operational Creditor, in a challenge to an order of possession passed by the NCLT.

Brief facts of the case:

  1. The Kolkata Municipal Corporation (KMC) had attached the property of the corporate debtor within the provisions of the Kolkata Municipal Corporation Act, 1980 (1980 Act) in the process of recovery of municipal tax dues.

  2. Subsequently, an application for insolvency of the Corporate Debtor was filed before the National Company Law Tribunal, Kolkata Bench (NCLT); it was admitted and a Resolution Professional (RP) was appointed for the initiation of Corporate Insolvency Resolution Process(CIRP).

  3. The RP thus representing the owner of the asset (corporate debtor), approached the NCLT for receiving possession of the property lying with KMC.

  4. NCLT allowed the application and directed KMC to handover possession of the property to the RP such that the process of CIRP could be completed and the debts of the corporate debtor may be cleared.

  5. Challenging the order of NCLT (the impugned order), KMC moved the High Court, filing a writ petition in which the present judgment has been passed.

The grounds of challenge in the writ petition:

  1. KMC being a statutory authority, took possession in exercise of its statutory powers and hence the asset taken possession of shall not fall within the scope of Insolvency and Bankruptcy Code, 2016 (IBC).

  2. Within the meaning of section 18 of IBC, the exercise of power by the RP for control and custody of any asset shall be subject to determination of ownership by a court or authority and since in this case, the possession/ownership of the property lies with KMC, such power cannot be exercised by the RP.

  3. The writ jurisdiction of this court can be invoked against an order of the NCLT, in-spite of availability of an alternate remedy because the NCLT in this case lacked jurisdiction and this was not merely a case of wrongful exercise of jurisdiction.

The contentions of the Corporate Debtor:

  1. The question here directly related to the property of the corporate debtor and hence NCLT shall have jurisdiction in adjudicating disputes relating to such property.

  2. No distinction can be drawn between statutory/crown dues and operational debts.

  3. The determination of ownership by courts or statutory authority as envisaged under section 18(1)(f)(vi) are not necessarily to be yielded to in all cases.

  4. The asset in question had not been sold yet, thus retaining the ownership of the corporate debtor over such property.

  5. An alternate remedy of appeal provided under section 61 of IBC was available to the petitioners and hence the present writ petition shall not be maintainable.

Issues:

The Single Bench comprising of Hon’ble Justice Sabyasachi Bhattacharya primarily decided on two issues:

  • The maintainability of the writ petition

  • A statutory claim being a subject matter of a CIRP.

Finding:

  1. The Court discussed the process of CIRP and the role of NCLT and the RP in such process to bring out the nature of disputes falling within the jurisdiction of NCLT and the scope of IBC in the resolution or liquidation process.

  2. The Court relied heavily on the ratio in Embassy Property Developments Pvt. Ltd. vs. State of Karnataka (2019 SCC OnLine SC 1542) wherein the Supreme Court discussed on the relevance of distinction between ‘lack of jurisdiction’ and ‘wrongful exercise of jurisdiction’ in coming to the conclusion as to maintainability of a writ petition under Article 226 when a statutory alternative remedy is available.

  3. The Court also relied on Union Bank of India vs. Satyawati Tondon [(2010) 8 SCC 110] which held that the rule of exhaustion of alternate remedy is a rule of discretion and not compulsion. Authorized Officer, State Bank of Tavancore vs. Mathew K.C. [(2018) 3 SCC 85] held that discretionary jurisdiction under Article 226 can be invoked even when alternative statutory remedies are available.

  4. In this case, since the petitioners had challenged the order on the basis of lack of jurisdiction of NCLT, the Court found that the order was amenable to challenge under Article 226.

  5. Since the writ petition was found to be maintainable, the Court went on to the next issue, being the primary issue, whether possession of property could be taken over by a RP under the provisions of IBC when the same lies with an authority under a statutory Act.

  6. Again, the Court referred to the decision in Embassy Property. The Supreme Court in Embassy Property while explaining the scope of section 60(5), the jurisdiction of NCLT, stated that such provision shall not mean to include all questions of law and facts under the sky.

  7. However, an exception may be carved out in cases when the dues of the government have been crystallized in which case the liability of the corporate debtor is finalized and the dues of the government become operational dues which shall be payable in terms of the Resolution Plan.

  8. Following the decision in Embassy Property, the Court stated that the jurisdiction under section 60 shall be defined in terms of the duties of an interim resolution professional provided under section 18.

  9. On this aspect, the Court found that the interpretation of the provision under section 18(1)(f)(vi), as adopted in Embassy Property was the correct view and thus the power of RP to take possession of a property shall be subject to determination of ownership by a court or authority.

  10. A connected issue that arose at this stage was whether the possession of the property by KMC called for “determination of ownership” in the facts of this case.

  11. The Court found that KMC had followed relevant procedures for presentation of a demand notice against the municipal dues under Section 216 of the 1980 Act and thereafter, distraint of the property on failure of the Corporate Debtor to act in terms of such notice under sections 217-220 of the 1980 Act.

  12. In view of the above, there was no question left for “determination” of the ownership. Since the debt of KMC had been established, it could very well be brought within the realm of operational dues and paid accordingly in terms of the Resolution Plan.

Decision:

Answering the two issues that had been framed, the Court held:

  1. The Writ Petition was maintainable since a question of lack of jurisdiction of NCLT was raised.

  2. Availability of an alternate remedy is no bar to invoking writ jurisdiction of a High Court.

  3. The claim of KMC had attained finality and thus in view of the decision in Embassy Property its dues could come within the purview of operational debt. The NCLT had jurisdiction in directing the RP to take possession of the asset in question.

  4. The RP is the appropriate authority in cases of CIRP to take custody and control of the asset.

  5. Income tax dues, also referred to as crown dues, cannot gain precedence over the dues of secured creditors, as held in Commissioner of Income Tax vs. Monnet Ispat of Energy Ltd.

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