Introduction

This decision addresses a recurring point at the intersection of insolvency law and municipal taxation: whether an auction purchaser of assets sold in liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC) can be saddled with pre-sale municipal property tax arrears; and whether the Kolkata Municipal Corporation (KMC) may refuse mutation until such arrears (including those of the erstwhile owner) are paid. The case arises out of a liquidation sale of leasehold factory units and car parking spaces at Paridhan Garment Park, Kolkata, originally owned by Enfield Apparels Ltd., a corporate debtor in liquidation.

The petitioners (Cotton Casuals India Private Limited and allied purchasers) challenged consolidated demands totaling Rs. 1,23,84,142 towards property tax, interest, and penalty for periods from the 2nd quarter of 2008 to the 2nd quarter of 2024, and KMC’s refusal to mutate the properties unless these dues were paid. While the petitioners accepted liability prospectively from 19 January 2022 (the date of possession), they disputed liability for arrears predating their purchase.

The key questions were:

• Can KMC lawfully refuse mutation due to arrears standing against the transferor?
• Does an IBC auction purchaser bear pre-sale property tax arrears by reason of statutory first charge and the “as is where is” nature of sale?

The judgment is significant for clarifying the effect of Section 232 of the Kolkata Municipal Corporation Act, 1980 (KMC Act) (first charge for property tax), the scope of KMC’s power under Section 183(5) to refuse mutation post-1997 amendment, and the relationship between municipal charges and IBC sales conducted on an “as is where is, whatever there is and without recourse” basis.

Summary of the Judgment

The Court dismissed the writ petition, upholding the KMC’s refusal to mutate and its demand for pre-sale property tax arrears. The principal holdings are:

• Post the 1997 amendment to Section 183(5) KMC Act, KMC is empowered to refuse mutation where arrears are due on account of the transferor or predecessor-in-interest. The refusal in this case was therefore lawful.
• Section 232 KMC Act creates a “first charge” on land/buildings for property tax dues. This statutory encumbrance “runs with the property.” Accordingly, an auction purchaser takes the property subject to this charge unless sale terms expressly provide otherwise.
• The sale was conducted on an “AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE” basis with explicit clauses placing the burden of due diligence regarding encumbrances and dues on the bidder. Following Supreme Court authority, such a sale transfers encumbrances and liabilities to the purchaser unless expressly excluded.
• Section 238 IBC (overriding effect) was held inapplicable because there was no inconsistency between the IBC and the KMC Act: the municipality could either lodge a claim in liquidation or independently enforce its statutory first charge.
• Distinguishing AI Champdany and other precedents cited by the petitioners, the Court held that those cases did not involve a statutory first charge like Section 232 or were decided on different contexts (e.g., resolution stage “clean slate,” or inadequate notice in the sale documents).

Consequently, the Calcutta High Court affirmed KMC’s right to insist on prior clearance of arrears before mutation and held the petitioners liable for pre-sale property tax dues.

Analysis

Precedents Cited and How They Influenced the Decision

1) Union of India v. Naskarpur Jute Mills Co. Ltd., (1994) 1 SCC 575

The Court cited this decision to emphasize that when the Official Liquidator sells property, he does not warrant title or freedom from encumbrances. Buyers must satisfy themselves as to title, encumbrances, and liabilities and cannot later seek relief based on defects discoverable through diligence. This underpins the high threshold of buyer diligence in court/OL-conducted auctions.

2) K.C. Ninan v. Kerala State Electricity Board, (2023) 14 SCC 431

This three-judge bench authority played a central role. It clarifies that an “as-is-where-is” sale extends beyond physical condition to title and liabilities attaching to the property. Prospective buyers are on notice to verify encumbrances and dues; the expression shifts risk to bidders absent express contrary stipulations. The High Court used this to hold that statutory dues, including municipal taxes, can bind the purchaser.

3) AI Champdany Industries Ltd. v. Official Liquidator, (2009) 4 SCC 486

Relied upon by the petitioners to argue that property tax dues are not a charge absent statutory creation and cannot be foisted on the purchaser. The High Court distinguished AI Champdany by pointing to Section 232 KMC Act which expressly creates a first charge over land/building for property tax—something that AI Champdany did not consider. Thus, unlike in AI Champdany, KMC is here a secured creditor by operation of law.

4) IISCO Ujjain Pipe and Foundry Co. Ltd. v. Ujjain Nagar Palika Nigam, (2023) 8 SCC 138

Petitioners invoked IISCO to suggest that absent clear notice in sale documents, pre-existing dues cannot be foisted by deeming fiction. The High Court found IISCO distinguishable on two counts: (i) the case did not concern the KMC Act’s statutory first charge; and (ii) the present EOI and sale notice repeatedly emphasized “as is where is,” independent due diligence, and non-warranty.

5) Grasim Industries Ltd. v. Kolkata Municipal Corporation, 2018 SCC OnLine Cal 9630; and KMC v. Grasim Industries (APO 228/2018)

These Calcutta High Court decisions protected purchasers from pre-sale property tax where no statutory first charge applied. The Court held them inapplicable since Section 232 KMC Act squarely creates a first charge—fundamentally changing the legal complexion.

6) Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss ARC, (2021) 9 SCC 657

Petitioners relied on the “clean slate” doctrine for resolution applicants. The High Court explained that the doctrine applies to resolution (revival) and not to liquidation auctions. In liquidation, assets are sold on “as is where is” terms and the purchaser does not step into the corporate debtor’s shoes for revival; hence, no automatic cleansing of pre-existing encumbrances.

7) Principal CIT v. Monnet Ispat & Energy Ltd., (2018) 18 SCC 786; and Bhatpara Municipality v. Nicco Eastern Pvt. Ltd., 2021 SCC OnLine NCLAT 612

While cited by the petitioners for IBC’s overriding effect, the High Court held Section 238 IBC does not nullify KMC’s first charge where there is no inconsistency between statutory regimes. The municipality may either file its claim in liquidation or enforce the charge against the property.

Legal Reasoning Adopted by the Court

• Mutation power under Section 183(5) KMC Act: The 1997 amendment authorizes refusal of mutation where arrears exist on account of the transferor/predecessor. KMC’s refusal to mutate was therefore valid.
• First charge under Section 232 KMC Act: Property tax is a first charge on land/buildings (subject to prior land revenue). This charge runs with the property; it is not merely a personal liability. Consequently, the charge can be enforced against the property in whosoever’s hands it is found.
• “As is where is” sale and buyer diligence: The EOI and sale notice consistently required bidders to conduct independent diligence, disclaimed warranties or indemnities, and emphasized that reserve price excluded taxes and fees. Under K.C. Ninan, such terms mean that encumbrances and dues travel with the property unless excluded by contract.
• IBC Section 238 not triggered: The Court held there is no conflict between the IBC and the KMC Act in this context. Municipalities may either lodge claims before the liquidator (to participate in the Section 53 waterfall) or enforce the statutory charge externally. Therefore, Section 238’s overriding effect does not displace KMC’s first charge.
• Distinguishing petitioner’s authorities: The Court clarified that prior decisions shielding purchasers involved either no statutory charge (AI Champdany; Grasim) or different sale terms (IISCO) or a different stage of the IBC process (Ghanshyam Mishra’s “clean slate” at resolution stage).

Impact of the Judgment

This ruling consolidates three important propositions for Kolkata (and is persuasive for jurisdictions with similar municipal charging provisions):

• For auction purchasers under IBC (liquidation): Buyers must assume that statutory charges like KMC property tax arrears attach to the asset unless the sale expressly conveys the asset “free from encumbrances.” Pricing, diligence, and bid strategy must incorporate historical municipal arrears risk.
• For municipal bodies: KMC can lawfully refuse mutation until arrears are paid, leveraging the Section 183(5) amendment. Municipalities may also choose between filing claims in liquidation or enforcing charges directly—though they must avoid double recovery.
• For liquidators and lenders: Sale documents should clearly specify whether assets are sold subject to or free from statutory charges. Where feasible, liquidators may consider obtaining quantified arrears or securing undertakings/escrows so that bidders can price accurately and post-sale disputes are minimized.
• For jurisprudence on Section 238 IBC: The decision underscores that Section 238’s override is not a universal solvent. Where statutory regimes can coexist without conflict (e.g., a municipality enforcing a first charge on property while the IBC governs distribution of proceeds), Section 238 is not engaged.

In practical terms, the judgment will likely elevate the diligence baseline for bidders in liquidation sales of immovable property within KMC limits, and will influence drafting of EOIs and sale notices to foreground statutory charges and mutation preconditions.

Complex Concepts Simplified

• As is where is, whatever there is and without recourse: A sale term meaning the seller gives no warranties about the property’s condition, title, or liabilities. The buyer must investigate everything (including dues and encumbrances) and cannot later claim relief due to defects discoverable by diligence.
• First charge (Section 232 KMC Act): A statutory security interest that sits on top of the property for municipal property tax. It “runs with the property,” making the asset answerable for arrears regardless of change in ownership.
• Mutation (Section 183(5) KMC Act): The municipal recordation of a change in ownership/occupier for taxation purposes. Post-1997, KMC may refuse mutation where arrears exist against the transferor or the applicant’s predecessor-in-interest.
• Section 238 IBC (overriding effect): Provides that IBC prevails over inconsistent laws. It does not apply where two statutes operate in different fields without conflict—e.g., liquidation distribution vis-à-vis an independently enforceable statutory charge.
• Liquidation v. Resolution under IBC: Resolution aims to revive the corporate debtor; approved plans give resolution applicants a “clean slate.” Liquidation aims to realize and distribute assets; assets are typically sold “as is where is,” and buyers do not get the same “clean slate” protection.
• Encumbrance: A legal claim or liability attached to property, such as a statutory charge, mortgage, or unpaid municipal dues that reduce the property’s value or restrict its transfer until cleared.
• Caveat emptor (buyer beware): A doctrine requiring buyers to exercise due diligence. In auctions by liquidators/OLs, courts place a high onus on bidders to investigate liabilities and encumbrances.

Factual Context and Timeline

• 2018–2019: CIRP of Enfield Apparels Ltd. ended in liquidation. The liquidator issued e-auction notices for factory modules and allied assets at Paridhan Garment Park.
• 24.02.2020 and 12.03.2020: NCLT, Kolkata set aside an earlier auction and confirmed sale in favour of the petitioner (Rs. 15.50 crores).
• 19.01.2022: Possession handed over to petitioners; 07.05.2022: Deeds of Assignment executed for four modules and six parking spaces.
• 29.08.2024: Petitioners applied for mutation, offering to pay taxes from their purchase date (07.05.2022). Note: The Court proceeded on possession date (19.01.2022) for admitted liability.
• 18.11.2024: KMC demanded arrears including those of the erstwhile owner and refused mutation pending payment. The initial reference in para 1 to “18.11.2014” appears to be a typographical error; the operative date is 18.11.2024, as affirmed later in the judgment.

Issues and Findings

Issue 1: Can KMC refuse mutation for arrears owed by the transferor/predecessor?

Finding: Yes. The proviso to Section 183(5) KMC Act post-1997 explicitly empowers KMC to refuse mutation in such cases. The refusal was lawful and consistent with the statutory framework.

Issue 2: Is an IBC auction purchaser liable for pre-sale property tax arrears?

Finding: Yes, on these facts. Section 232 KMC Act creates a first charge that runs with the property. Coupled with an “as is where is, whatever there is and without recourse” sale and explicit due diligence clauses, the purchaser took the property subject to municipal arrears. Section 238 IBC does not negate this outcome because there is no inconsistency between enforcing a statutory first charge and the IBC’s liquidation regime.

Practical Takeaways

• Prospective bidders in liquidation sales of immovable property within KMC limits should:
  • Obtain a no-dues certificate or an official arrears statement from KMC before bidding.
  • Price in quantified municipal arrears and potential interest/penalties.
  • Seek express sale terms stating “free from encumbrances” if the bidding strategy requires a clean asset.
  • Document diligence (municipal, electricity, water, lease covenants) comprehensively.
• Liquidators should:
  • Collect and disclose municipal arrears as part of the information memorandum and EOI.
  • Consider escrow arrangements or sale terms allocating responsibility for identified dues to minimize post-sale disputes.
  • Ensure sale notices align with the intended risk allocation (subject to encumbrances vs. free from encumbrances).
• Municipal bodies should:
  • Communicate arrears promptly on request so bidders can make informed decisions.
  • Avoid double recovery by adjusting claims if amounts are realized via enforcement of the statutory charge.

Critical Notes and Open Questions

• Choice of remedy and double recovery: The Court recognizes that a municipality may either lodge a claim in liquidation or enforce a first charge. While sound in principle, care must be taken to avoid double recovery if both routes are pursued sequentially.
• Scope beyond KMC Act: The ruling turns on Section 232 KMC Act. Other municipalities in West Bengal (or elsewhere) will need to examine whether their statutes create comparable first charges to apply this reasoning directly.
• Leasehold nuances: The assets here were leasehold factory modules. The judgment assumes, without contest, that the first charge applies to such interests; parties in other cases may litigate how first charges attach across different property interests.
• IBC valuation and sale strategy: Allowing independent enforcement of statutory charges post-sale can depress liquidation realizations if bidders price-in large arrears. This underscores the need for liquidators and CoCs to incorporate municipal clearance strategies within the sale process itself.

Conclusion

This decision fortifies the principle that statutory municipal charges embedded in local legislation can survive an IBC liquidation sale conducted on “as is where is” terms and bind the auction purchaser. Two planks support the result: the KMC Act’s first charge (Section 232) which makes property tax arrears an encumbrance running with the property; and the post-1997 mutation proviso (Section 183(5)) which empowers KMC to refuse mutation pending arrears. The Court’s deployment of K.C. Ninan underscores that “as is where is” is not a mere statement about physical condition—it squarely allocates the risk of encumbrances and statutory dues to the bidder unless the contract provides otherwise.

Equally important, the Court harmonizes IBC with municipal law by holding that Section 238’s override is not engaged in the absence of inconsistency: KMC can either participate in the liquidation waterfall or enforce its first charge against the property now with the purchaser. The decision therefore draws a bright line between resolution-stage “clean slate” protection and liquidation-stage asset sales, reaffirming that auction purchasers do not inherit that protection.

In broader legal context, the judgment nudges all stakeholders—municipalities, liquidators, lenders, and bidders—toward greater transparency and diligence. For bidders, it is a clear reminder: in liquidation, “buyer beware” truly means “beware of encumbrances,” and municipal property tax arrears may be first in line.