India: Property Dues Relating To Liquidation Period To Be Discharged By Liquidator Or Auction Purchaser Dispute Regarding Onus

Last Updated: 18 May 2017
Article by Abhijeet Swaroop and Esha Sandhu

Most Read Contributor in India, May 2017

Introduction

There is immense litigation initiated by auction purchasers, who are fastened with liability relating to outstanding dues of the Company in liquidation, in respect of the property / asset being put to auction by the Official Liquidator. These outstanding dues essentially relate to the period when sale in respect of the subject property is not even confirmed in favour of such auction purchasers. Typically, the liability is contested based on the interpretation of the terms of the 'Notice For Sale' issued by the Official Liquidator and the Order of the concerned High Court (Company Court) confirming the sale in favour of the auction purchaser.

Issue

The present article seeks to analyse the liability issues concerning sale of assets of companies in liquidation by the Official Liquidator and the onus to discharge the outstanding liability relating to the said assets pertaining to the pre-sale confirmation period (post liquidation liability). While it is reasonable to presume that such pre-transfer liability should be borne by the Official Liquidator (being the legal custodian of the company in liquidation), there is a practice of requiring the auction purchasers to discharge the liability once the sale is confirmed in their favour.

Procedure For Sale Of Assets Adopted By Official Liquidator

Post admission of a winding up petition filed at the behest of a creditor or a contributory1, an Official Liquidator is appointed as the legal custodian of the company, who steps into the shoes of the company and takes charge of its assets and other statutory records. In terms of the liquidation process contemplated under the Companies Act, 1956 ("the Act")2, the Official Liquidator procures preparation of a schedule of assets of the company and puts the assets for auction/ sale.

The Official Liquidator thereafter prepares a Notice For Sale, detailing the terms and conditions governing the process of auction of the concerned asset/ property of the company. The said notice is typically published in two of the national dailies thereby putting the public at large to notice of the terms of sale. Official Liquidator is also authorized to prescribe the reserve price of the property and the amount of earnest money to be deposited upon consultation with the 'Assets Sale Committee' and thereafter conduct the auction process to derive/ obtain the best price for the asset/property.

The eligible bidders, who qualify as per the Notice For Sale are invited to participate in the auction process. The auction is conducted by the Official Liquidator and the sale is confirmed in favour of the highest bidder. Upon conclusion of the auction proceedings, which are recorded formally by the Official Liquidator in a Report, the successful bidder deposits the sale consideration with the Official Liquidator, who places the said Report before the concerned Company Court to obtain a formal order confirming the sale. The Company Court upon considering the contents of the Report and after adjudicating any objections that may be raised by the other bidders, confirms the sale in favour of the highest bidder. The auction proceeds are then utilized by the Official Liquidator for payment of outstanding dues of the company and dues of the creditors (both secured and unsecured) in terms of the priority prescribed under the Act. Typically, the order of the [Company Court] confirming the sale provides that the successful bidder shall be liable to discharge the dues relating to the said property from the date of such confirmation.

Dispute

There are large number of cases where the municipal authorities / local authorities insist upon payment of the outstanding dues by the auction purchasers, failing which the legitimate rights of such auction purchasers are delayed on grounds of such non-payment. Usually the auction purchaser is apprised of such liability only when it approaches the corporation / authority for mutation of records, alteration of entry in register of rights etc., which is made subject to payment of such outstanding dues. Legally the said liability is to be discharged by the Official Liquidator out of the sale proceeds deposited by the auction purchaser, however, there is no attempt made by the authorities to realise the said dues from the Official Liquidator.

While the auction purchasers contest that their liability to discharge the dues relating to the property being put to auction accrues only from the date when the sale is confirmed, corporations / authorities premise their claim on the basis that the auction purchaser is liable to discharge the said liability as the property is typically sold on 'as is where is basis'.

Aforesaid Practise Is Contrary To Law

The demand raised by the corporations / authorities is bad in law on account of the following:

  1. Since the Official Liquidator is the legal custodian of the assets / properties of the Company during the pre-sale confirmation period, it is the [duty] of the Official Liquidator to discharge any dues relating to the Company which became due during the said period. It is a settled law that post admission of a winding up petition, the Official Liquidator steps into the shoes of the Company and is therefore required to discharge the liabilities of the Company as they would have been discharged by the Company itself had it been in active operation;
  2. The dues relating to the property are either to be borne by the owner of the property or in certain given cases by the person, who was in possession of the said property during the period with which the dues relate. Clearly the bonafide auction purchaser cannot be fastened with the liability relating to the pre-sale confirmation period as during the said period the auction purchaser was neither the owner of the property nor was he in possession thereof, which is only handed over upon post confirmation of sale by the concerned Company Court and post registration of sale deed3;
  3. It is a settled law that an auction purchaser cannot be expected to verify from all and sundry local authorities regarding the dues relating to the Company before participating in the auction, which is typically conducted based on the terms of the Notice For Sale. In any event, the Official Liquidator, being the legal custodian of the property and being in-charge and in possession of the statutory records and the books of the Company, is better suited to make such enquiry relating to the outstanding dues, as opposed to the auction purchaser. In the absence of knowledge regarding the existence of such outstanding dues, the auction purchaser cannot be expected to discharge them particularly when it has already paid the sale consideration amount and considering such dues relate to the pre-sale confirmation period;
  4. The Official Liquidator having actual / deemed knowledge of the existence of outstanding dues should either disclose the same upfront, expressly as a term of the Notice For Sale or should bear the liability. Clearly, if the Notice For Sale is silent4, then the bonafide auction purchaser should not be made liable to discharge the said dues on a twisted interpretation of clauses like "property is being sold on as is where is basis" and "caveat emptor". There are judicial pronouncements5 to suggest that such clauses can at best be interpreted to refer to the quality and condition of the assets being put to auction and not remote outstanding dues, which were never brought to the notice of the bonafide auction purchasers;
  5. The sale is confirmed in favour of the auction purchaser upon payment of the sale consideration which is deposited with the Official Liquidator, who initiates and conducts the process of sale. The outstanding dues relating to the property of the Company in liquidation should therefore be required to be paid by the Official Liquidator out of the sale proceeds6;
  6. The Official Liquidator has access to the records of the Company and has the resources to verify the existence of the actual outstanding dues. The Official Liquidator also has the benefit of assessing / fixing the reserve price, with the aid and assistance of the Assets Sale Committee. The Official Liquidator supervises, controls and concludes the auction process. Having regard to the above, the Official Liquidator is relatively in a better position to assess what is the best price for the property and when the auction procedure is actually to be concluded. The Official Liquidator therefore has the discretion to re-conduct / continue with the auction purchase till he is satisfied that the price obtained is adequate to satisfy the outstanding dues of the Company, rather than fastening the said dues on the bonafide auction purchaser;
  7. Even under Section 55 of the Transfer of Property Act, 1882, it is the liability of the seller to discharge all public charges /rent/ dues/ encumbrances relating to the property being put to auction up to the date of the sale. The buyer accordingly is required to discharge the said dues only from the date of the sale. Admittedly, for companies in liquidation, the Official Liquidator, being the legal custodian is the seller of the property and therefore, is required to discharge the said dues relating to the property till the date of the sale and the liability of outstanding dues should not be fastened to a bonafide auction purchaser, who had no relation whatsoever with the property prior to the date of confirmation of sale;
  8. Making the legal right of the auction purchaser to have the property mutated in its name, subject to payment of outstanding dues relating to the pre-sale confirmation period, is totally contrary to the settled law that the mutation proceedings cannot be stalled and made subject to alleged dispute relating to liability to pay outstanding dues.7

Conclusion

There is sufficient material to suggest that the corporations / authorities have no sustainable legal basis to insist that the outstanding liability relating to the property being put to auction, essentially pertaining to the pre-sale confirmation period, should be discharged by the auction purchasers. Instead there are cogent grounds and valid reasons to indicate that such dues relating to the pre-sale confirmation period should be discharged by the Official Liquidator, who is admittedly the legal custodian of the assets / properties of the Company. Despite the above, it appears that the corporations / authorities do not pursue the Official Liquidator for payment of such dues and instead choose to fasten the said liability on the auction purchasers. This stance is ex facie illegal and amounts to unnecessarily arm twisting the auction purchasers, whose valid and justifiable rights are made subject to payment of the said outstanding dues. Consequently the auction purchasers are forced to take recourse to legal proceedings which consumes sufficient time and resource.

Footnotes

1. The jurisdiction earlier was with High Courts, however, with effect from 15 December 2016, winding up Petitions, in which service was not complete, have been transferred to National Company Law Tribunal, which now appoints an Insolvency Professional instead of Official Liquidator.

2. While the High Court under the 1956 Act had the power to appoint Official Liquidator, the said power under the Companies Act, 2013 now vests with National Company Law Tribunal, which appoints Insolvency Professionals to take charge of the assets and records of the Company.

3. Official Liquidator, High Court, Calcutta vs. Ujjain Nagar Palika Nigam, (2009) 2 Cal LJ 360 –Calcutta High Court held that the liability with respect to payment of property tax and water tax was a post-liquidation liability and was to be borne by the Official Liquidator in the absence of a clear provision in the sale notice. The High Court further held that the expression "as is where is whatever there is basis" does not comprise within its ambit the liability to clear statutory charges as might have accrued and are in arrears.

4. Gaurav Kanvarjuneja and Ors vs. Surat Municipal Corporation and Ors., 2016 SCC OnLine Guj 6140 –Gujarat High Court quashed and set aside the action of Surat Municipal Corporation recovering the property tax arrears for the properties purchased by petitioners in a Bank auction, without informing the petitioners that there is any property tax due for the properties/shops prior to the purchase.

5. AI Champdany Industries Ltd. vs. Official Liquidator, (2009) 4 SCC 486 - the Supreme Court in this judgment defined the term 'encumbrance' and held that property tax is not an encumbrance as it does not diminish the value of the property. Further it was also held that either the Companies Act or any other law does not impose any additional obligation upon the purchaser to make an enquiry with regard to the liabilities of the companies other than those which would impede their value.

6. AI Champdany Industries Ltd. vs. Official Liquidator, (2009) 4 SCC 486

7. Bijay Shankar Tripathi vs. Calcutta Municipal Corporation, AIR 1994 Cal 152

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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