The Mumbai Bench of the National Company Law Tribunal (NCLT) has ruled that maintenance dues and property tax dues arising during the liquidation period, even in respect of assets that stood attached by the Enforcement Directorate (provided they have not been confiscated and continue to vest in the Corporate Debtor), directly serve the purpose of preservation and protection of the liquidation estate and bear the character of ‘liquidation costs’ within the meaning of Regulation 2(1)(ea) of the IBBI (Liquidation Process) Regulations, 2016.
Conversely, the Tribunal clarified that the dues arising during the CIRP period cannot be classified as “insolvency resolution process costs” merely because they accrued during that period; and that they must be directly related to the CIRP and expressly approved by the Committee of Creditors as mandated by Regulation 31(e) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
The Division Bench comprising Sushil Mahadeorao Kochey (Judicial Member) and Sanjiv Dutt (Technical Member) observed that under Section 5(13) of the IBC read with Regulation 31(e) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, a cost qualifies as a CIRP cost only if it is directly related to the CIRP and has been approved by the Committee of Creditors (CoC). In the present case, the CoC had not approved the maintenance dues to be treated as CIRP costs, and the mere fact that the dues arose during the CIRP period is not determinative for them to be classified as CIRP costs.
The Tribunal noted that ‘liquidation cost’ under Regulation 2(1)(ea) of the IBBI (Liquidation Process) Regulations, 2016 includes costs incurred by the Liquidator for preserving and protecting the assets of the Corporate Debtor. Maintenance charges payable to a cooperative housing society are indispensable to the continued functionality and marketability of the units, as non-payment entitles the Society to restrict access to common amenities, thereby rendering the units inaccessible and commercially unviable.
This deterioration would prejudice the interests of all stakeholders by diminishing the realizable value of the asset and impairing the Liquidator’s ability to present a clean and encumbrance-free asset for sale. Therefore, the payment of maintenance dues and property tax dues is a necessary incident of the preservation and protection of the assets, added the Tribunal.
On the effect of ED attachment under PMLA, the Tribunal observed that the subject properties had been exempted from confiscation under the PMLA. A provisional or confirmed attachment order under the PMLA freezes the property but does not extinguish the title of the owner or transfer it to the government; and only confiscation has the effect of vesting the property in the Union of India.
Since no confiscation took place, the properties retained their character as assets of the Corporate Debtor and became part of the liquidation estate under Section 36 of the IBC, and the Liquidator’s obligation to preserve and protect these assets is not extinguished or suspended merely by reason of a PMLA attachment, added the Tribunal.
Lastly, the Tribunal held that property tax dues accruing prior to the liquidation commencement date cannot be accorded priority treatment as CIRP costs because they were not approved by the CoC. However, property tax dues accruing after the liquidation commencement date are treated mutatis mutandis to maintenance dues and qualify as liquidation costs.
Briefly, the Applicant, Kohinoor City Office Towers Industrial Estate & Premises Co-operative Society Limited, is a cooperative society where the Corporate Debtor owned three commercial units. These units were attached by the Directorate of Enforcement (ED) under Provisional Attachment Orders in 2018 and 2019, which were subsequently confirmed by the Adjudicating Authority under the PMLA. The units remained in the custody of the ED from February 2018 until 5th May 2022, when they were handed over to the Liquidator pursuant to a Tribunal order directing the release of the attached assets.
The Corporate Insolvency Resolution Process (CIRP) commenced on 25th September 2019, and the Tribunal directed the initiation of liquidation proceedings on 26th February 2020, appointing Respondent No. 1 as the Liquidator. The Applicant Society submitted claims for maintenance and BTU Chiller usage charges, of which the Liquidator admitted Rs. 1.85 crores as operational debt under Section 5(21) of the IBC. The Liquidator subsequently sold the units in April 2024, warranting that the properties were sold free of all encumbrances and liabilities.
However, the Liquidator informed the Applicant that society dues and municipal charges would only be paid from the date of the handover of the assets by the ED i.e., 5th May 2022, until the issuance of the sale certificates, and settled those specific dues accordingly. The Applicant therefore filed the present application seeking priority payment of maintenance dues during the CIRP period as insolvency resolution costs, and maintenance and property tax dues during the ED attachment period as liquidation costs.
Appearances:
Advocates Nausher Kohli, Chandragupta Patil and Ashutosh Agarwal, for the Applicant
Advocates Rohit Gupta and Abha Patel, for the Respondent no.1
