Municipal tax arrears are not an encumbrance without an express charge, and liquidation claims must be pursued through winding-up.

Municipal property tax arrears were treated as a statutory liability, not an encumbrance, because no express statutory charge was shown to attach to the property; the auction purchaser therefore was not bound to discharge pre-sale dues. The Court also held that, on liquidation, the municipality had to prove its claim before the official liquidator and seek payment through the statutory distribution of assets under the Companies Act, 1956. As an unsecured creditor, it could not bypass the winding-up process or recover the arrears directly from the purchaser.

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Issues: (i) Whether municipal property tax arrears constituted an encumbrance on the assets sold in liquidation so as to bind the auction purchaser; (ii) Whether the municipality was required to prove its claim before the official liquidator and recover it from the sale proceeds in accordance with the winding-up provisions.

Issue (i): Whether municipal property tax arrears constituted an encumbrance on the assets sold in liquidation so as to bind the auction purchaser.

Analysis: The sale conditions required inspection of title and encumbrances, but the expression 'encumbrance' was construed in its legal sense as a burden, charge, lien or liability that attaches to property and impairs its value. Municipal property tax, in the absence of a statutory provision creating a charge on the property, was held to be only a statutory liability and not an encumbrance running with the property. Section 55(1)(g) of the Transfer of Property Act, 1882 governs public charges as between buyer and seller only in the absence of a contract to the contrary, and section 100 of that Act requires an express statutory charge before enforcement against a transferee for value without notice. No such charge was shown here.

Conclusion: The municipal tax arrears did not bind the auction purchaser as an encumbrance, and liability could not be fastened on the purchaser for the pre-sale dues.

Issue (ii): Whether the municipality was required to prove its claim before the official liquidator and recover it from the sale proceeds in accordance with the winding-up provisions.

Analysis: Upon liquidation, the company's assets and claims had to be dealt with under the Companies Act, 1956. Sections 456, 457 and 528 required the liquidator to take custody of the assets and admit claims against the company, while sections 529 and 529A governed distribution of the estate and priority among creditors. The municipality was treated as an unsecured creditor and could not claim priority over secured creditors or bypass the liquidation process by proceeding directly against the purchaser. The claim, if any, had to be lodged in liquidation and satisfied, if at all, from the sale proceeds in accordance with the statutory order of distribution.

Conclusion: The municipality was bound to pursue its claim in liquidation and could not recover the arrears from the auction purchaser.

Final Conclusion: The impugned judgment was unsustainable because municipal tax arrears were not an encumbrance on the sold assets, and the municipality's remedy lay only in the liquidation process as an unsecured creditor; the appeal therefore succeeded.

Ratio Decidendi: In the absence of an express statutory charge, municipal tax arrears do not constitute an encumbrance binding an auction purchaser, and a creditor in liquidation must seek recovery through the winding-up distribution under the Companies Act, 1956 rather than directly from the purchaser.

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