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March 13, 2009
Back to the Future: Property Purchaser Exempted from Past
Liabilities
The Hon’ble Supreme Court of India (“Court”)
has, by its order dated February 19, 20091,
held that a municipal corporation is not entitled to recover its
arrears of property tax levied on a property belonging to a
company under liquidation, from the purchaser of the property.
The municipal corporation would be treated as an unsecured
creditor of the Company and would therefore need to stand in
queue for its recovery of its dues from the Company, as part of
the distribution of assets by the Official Liquidator, as per
the provisions of Sections 529 and 530 of the Companies Act,
1956.
Brief facts:
Wool-Combers of India Ltd. (“Company”) went
into liquidation and was to be wound up. The Official Liquidator
took charge of its movable and immovable assets. As part of the
sale of assets by the official liquidator, AI Champdany
Industries Limited (“Appellant”) purchased the
assets of the Company. The sale was confirmed by the Learned
Company Judge on September 15, 2006.
Thereafter, Bhatpara Municipality (“Municipality”)
served notice (dated February 15, 2007) upon the Appellant
claiming payment of arrears of property tax for the period from
1991-1992 to 2006-2007 along with statutory interest thereon.
The Appellant took out chamber summons before the Learned Single
Judge praying for inter alia a clarification that the
sale confirmed in favour of the Appellant would make the
Appellant liable for payment of property tax only on and after
the date of confirmation of sale. This chamber summons was
dismissed by the court. In the order, the Learned Single Judge
stated that the terms and conditions of the sale specified that
the sale was made on an “as is where is basis and whatever there
is basis” and terms and conditions thereof also called upon the
bidders to satisfy themselves regarding the title and
encumbrance attached to the asset. The Learned Single Judge
stated that whilst “as is where is basis and whatever there is
basis” signifies the condition, quality and quantity in which
the asset sold exists and therefore, would not take into account
the liabilities attached to the asset sold, the second
condition, as to the bidders satisfying themselves about the
title and encumbrance, would include the liability attached to
the asset including the tax payable. An intra-court appeal to
the division bench of the said court was also dismissed.
The Appellant thereafter approached the Court.
Judgment:
The Court observed that even though the fact that the Company
had gone into liquidation was given due publicity, the
Municipality did not file its claim before the Official
Liquidator (to get the same recovered from the sale proceeds).
The Court also observed that indisputably, the manner in which
the claims of a creditor in respect of the dues of a company in
liquidation were to be realized have been laid down in Sections
529, 529A and 530 of the Companies Act. The Court stated
that dues in relation to municipal tax did not create an
encumbrance and/or charge upon the property and were a personal
liability.
Stating that the terms and conditions of sale must be read as a
whole and given a purposive meaning, the Court, whilst holding
that an encumbrance must be a charge upon the property, which
ran with the property, held that the Municipality was in fact,
an unsecured creditor and was required to stand in queue with
all other unsecured creditors for realization of their dues from
the sale proceeds and that the Companies Act or any other law
in force did not impose any additional obligation upon the
purchaser to make enquiry with regard to the liabilities of the
company other than those which would impede its value.
The Court further proceeded to hold that as it was settled law
(under Section 55 of the Transfer of Property Act) that
unless there was a contract to the contrary, the seller was
bound to pay all public charges due in respect of a property up
to the date of sale, when the property was sold in an auction
and that the advertisement did not specify that all public
charges would need to be paid.
Further, it was held that the Municipality was not a
preferential creditor and winding up proceedings under the
Companies Act are a special law and provisions of Sections 529
and 530 would need to be complied with whilst distributing the
assets between the creditors and unsecured creditors.
Analysis & Implications:
This judgment will be of great relief and comfort to the
purchasers of assets in liquidation proceedings and will speed
up the process of winding up which is, at present, a lengthy and
cumbersome process. More particularly, this judgment will clear
the ambiguities viz-a-viz the valuation of a property
insofar as such liabilities are concerned. Significantly, this
judgment categorically spells out that the correct remedy for
the Municipality in such a scenario is to approach the Official
Liquidator.
_____________________________
1. Civil
Appeal No. 1118 of 2009 arising out of SLP (C) No. 15285 of
2008.
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Sahil Kanuga
&
Vyapak Desai
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