In Al Champdany Industries Ltd v Official Liquidator and Anr, the Supreme Court answered in the negative the question of whether a municipal corporation can claim tax dues from the purchaser of a property that is sold as part of the winding up of a company, for the period before the sale, and whether the purchaser is liable to pay such tax dues.
In this case, the company went into liquidation and its assets were put up for sale by the court. The terms and conditions for the sale stated that assets would be sold on an “as is where is and whatever there is’’ basis, and that bidders had to satisfy themselves as to any encumbrance on the property. The company judge then confirmed the sale in favour of the company. The company received a notice from the municipal corporation claiming payment of arrears of property tax for periods prior to 15 September 2006, with interest. The company applied to the court for clarification on whether it was liable for the payment of property tax only from the date of confirmation of the sale and not for any prior period. The single judge dismissed the application, and division bench confirmed this. The company appealed to the Supreme Court.
In allowing the appeal, the Supreme Court noted the fact that the company was going into liquidation and had been given due publicity. The respondent-municipality did not file its claim before the official liquidator. The municipality was an unsecured creditor and could not stand on a higher footing than an ordinary unsecured creditor who is required to stand in the queue with all others similarly situated for the purpose of realization of his dues from the sale proceeds. The advertisement did not specify that all public charges had to be paid. Neither the Companies Act, 1956, nor any other law imposed any additional obligation upon the purchaser to make any enquiry with regard to the liabilities of the company other than those which would impede its value.
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Also, the dues of the municipality did not come within the purview of Crown debt. An encumbrance must be capable of being found out either on inspection of the land, or by application to the office of the registrar or a statutory authority. A charge, burden or any other thing which impairs the use of the land or depreciates its value may be a mortgage or a deed of trust or a lien or an easement. Encumbrance thus must be a charge on the property. If by a reason of the statute no such burden on the title which diminishes the value of the land is created, it shall not constitute any encumbrance.
The provision of law must expressly provide for enforcement of a charge against the property in the hands of the transferee for value without notice to the charge, and not merely create a charge. Under section 55(1) (g) of the Transfer of Property Act, 1882, the seller is bound to pay all public charges due in respect of the property up to the date of sale, when a property is sold in auction. Section 55 refers to a contract only. Unless there is a contract to the contrary, the rights and obligations of the parties to a sale must be expressed and not implied, as a result whereof the meaning of the term encumbrance would be expanded.
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The update of court judgments is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in, lbhasin@vsnl.com or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.
