Liquidation priority rules bar sales tax claims from overriding workmen and secured creditors, while auction buyers take assets free of pre-liquidation dues

In company liquidation, the statutory distribution scheme under the Companies Act gives overriding priority to workmen's dues and secured creditors, and sales tax dues cannot displace that priority or claim a superior charge through revenue recovery or attachment under State law. Such tax claims must be lodged within the liquidation process and do not override the pari passu framework. Where company assets are sold through the Official Liquidator, auction purchasers take the property free of pre-liquidation tax liabilities, and pre-existing tax attachments must be removed so that clear title passes. The pre-liquidation tax debt remains payable only in liquidation, not by the purchaser.

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Issues: (i) Whether sales tax dues of the company in liquidation could claim priority over the pari passu rights of workmen and secured creditors under the winding up provisions of the Companies Act, 1956 and override the statutory distribution scheme. (ii) Whether auction purchasers of the company's assets were liable to satisfy pre-liquidation sales tax dues or could insist on removal of the tax attachments and obtain title free from such encumbrances.

Issue (i): Whether sales tax dues of the company in liquidation could claim priority over the pari passu rights of workmen and secured creditors under the winding up provisions of the Companies Act, 1956 and override the statutory distribution scheme.

Analysis: The winding up provisions in Sections 529, 529A and 530 of the Companies Act, 1956 govern distribution of the assets of a company in liquidation. Section 529A, introduced later, contains a non obstante clause and gives overriding priority to workmen's dues and secured creditors' debts over all other debts. Section 530 operates only after satisfaction of the priority prescribed by Section 529A. A claim of the State for sales tax, even if treated as a governmental or crown debt, cannot displace the statutory scheme. The Court also held that any preference said to flow from the Bombay Land Revenue Code, including Section 137, could not prevail against the later Central enactment, and the State's reliance on attachment or recovery machinery did not create a superior charge in liquidation.

Conclusion: The sales tax department had no priority over the claims protected by Sections 529A and 530 of the Companies Act, 1956, and its claim had to be lodged with the Official Liquidator in accordance with that statutory scheme.

Issue (ii): Whether auction purchasers of the company's assets were liable to satisfy pre-liquidation sales tax dues or could insist on removal of the tax attachments and obtain title free from such encumbrances.

Analysis: Once the assets of the company in liquidation were sold through the Official Liquidator, the purchaser was entitled to the property on the terms of the sale and free from pre-liquidation liabilities. The Court held that the tax department's attachment did not defeat the sale or alter the liquidation priorities. The purchasers were not required to discharge liabilities relating to the period before winding up, and the Official Liquidator and revenue authorities were bound to clear the encumbrances so that clear and marketable title could pass to the auction purchasers.

Conclusion: The auction purchasers were not liable for pre-liquidation sales tax dues, and the attachments on the property were required to be removed.

Final Conclusion: The review application failed, the tax department's claim to priority was rejected, and the auction purchasers and Official Liquidator were entitled to proceed on the basis that pre-liquidation tax liabilities remained payable only in liquidation and not by the purchaser.

Ratio Decidendi: In a company liquidation, the statutory priority under Section 529A of the Companies Act, 1956 overrides any competing claim of sales tax or other governmental dues, and pre-liquidation attachments cannot be enforced against the purchaser of the company's assets.

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