2023 (5) TMI 257 - SC - Companies Law

Official Liquidator's Liability for Post-Liquidation Taxes Extended by Supreme Court

The Supreme Court upheld the decisions of the Company Court and the Division Bench, affirming that the Official Liquidator (OL) was liable for ... Claim against Official Liquidator representing company subsequent to the order of winding up - Demand of property tax and water tax from the appellant in relation to the company in liquidation from the date of order of winding up and until the date of confirmation of sale of assets to the auction purchaser - HELD THAT:- On perusal of the contents of the sale notice dated 09.05.2003 in the present case and the relevant terms and conditions of sale of the assets of the company in liquidation. It is evident that expansive technical expressions were used in the present case by the appellant OL in the terms and conditions of the sale that the same would be on “as is where is whatever there is” basis and then, further disclaimer was stated that the appellant OL was not providing any guarantee as to the quality, quantity or specification of the assets sold. Such stipulations and disclaimers were definitely putting the purchasers to notice to get themselves acquainted with what the property is (the nature and extent); where the property is (the locational attributes); and whatever there is (quantity and condition of the property) - All such stipulations were essentially pertaining to the physical properties/attributes of the assets in question but, the significant omission in those terms and conditions had been to make it obligatory on the bidder/purchaser to make himself aware about encumbrances, liens and claims attached to the assets in question. This omission strikes at the very root of the case of the appellant. In UT Chandigarh Administration [2009 (3) TMI 862 - SUPREME COURT], this Court dealt with the consumer complaints of respondents filed to contend that the appellant was not legally entitled to claim balance of premium or annual rent, for having failed to provide basic amenities at the residential and commercial sites auctioned by way of advertisement. This Court allowed the appeals as the purchaser was not a consumer with reference to public auction of existing sites. It has rightly been argued on behalf of the contesting respondents, with reference to Section 100 of the Act of 1882 and the decision of this Court in AI Champdany Ltd. [2009 (2) TMI 470 - SUPREME COURT], that in absence of any statutory provision, the auction purchaser without notice of any charge could not be made liable for the arrears of tax in question during the post-liquidation period. The provisions of the M.P. Act of 1956 were not creating any such encumbrance or charge on the property which would attach to the property for all times and under all circumstances nor they could be said to constitute any encumbrances which diminish the value of the property. In contrast, they would only qualify as expenses for “preserving, realising or getting in” the assets of the company and thus, shall have to be paid in priority and before any other payment in the course of distribution of the assets of the company or value thereof. The Company Court and then the Division Bench of the High Court have rightly underscored the faults on the part of the appellant OL and have rightly held that the liability on account of the property tax and water tax claimed by the respondent No. 1 to the extent rejected by the appellant OL has been a post-liquidation liability, which the OL was obliged to discharge, in view of omission in the sale notice and then, in view of the operation of Rule 338 of the Rules of 1959 - Appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether claims for municipal property tax and water tax that accrue after the date of a winding-up order and before confirmation of sale are admissible against the Official Liquidator (OL) or must be borne by the purchaser. 2. Whether post-liquidation municipal and water tax liabilities constitute costs/expenses of winding up payable in priority out of company assets under the Companies (Court) Rules, 1959 (Rule 338), notwithstanding Sections 529A and 530 of the Companies Act. 3. The legal effect of a court-ordered sale of company assets on 'as is where is whatever there is' terms - whether such a stipulation and accompanying disclaimers operate to shift post-liquidation statutory tax liabilities to an auction purchaser in absence of an express term requiring the purchaser to satisfy himself as to encumbrances. 4. Whether municipal tax provisions (specifically a provision making municipal taxes a first charge and a proviso protecting non-owners/occupiers) create an enforceable charge against property in the hands of a transferee for value without notice. 5. Whether Sections 529A and 530 of the Companies Act and Rules 154 and 163 of the Companies (Court) Rules, 1959 preclude admission or payment of post-liquidation claims by the OL. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Liability for post-liquidation municipal/water taxes: admissible against the OL or purchaser? Legal framework: The Companies Act contains provisions on preferential payments (Sections 529A, 530) and the Companies (Court) Rules govern valuation and communication of proofs (R.154, R.163) and the order of priorities for payments including expenses of preserving/realising assets (R.338). The local municipal statute makes municipal taxes a first charge on land and movables with a proviso protecting occupiers who are not owners from arrears for periods when they were not in occupation. Precedent treatment: Authority recognising that an OL normally gives no warranty and that purchasers must satisfy themselves as to title and encumbrances has been applied where sale terms expressly required purchaser to inquire; other authorities hold an auction purchaser cannot be made liable for charges without notice and that municipal dues may be personal liabilities not running with property unless statute so provides. Interpretation and reasoning: The Court examined the particular sale notice and its terms and distinguished precedents where the sale terms explicitly required inquiry into encumbrances. Here, the sale notice contained disclaimers about quality/quantity and warned purchasers to inspect physical attributes, but omitted an express obligation to satisfy themselves about encumbrances, liens and statutory dues. In that factual matrix the purchaser could not be held to constructive notice or be fastened with post-liquidation arrears that accrued during the period when the property was custodia legis. Parallelly, Section 185 of the municipal statute operates to make taxes a first charge but protects occupiers who were not owners for periods they did not occupy; this further reinforced the purchaser's expectation that post-sale arrears might not be recoverable from him absent notice. Ratio vs. Obiter: Ratio - where sale terms do not put purchaser expressly on notice to investigate encumbrances, the purchaser cannot be saddled with post-liquidation municipal/water tax arrears which arose prior to confirmation of sale; such arrears are not automatically shifted by an 'as is where is' clause that pertains mainly to physical attributes. Obiter - observations on purchaser inquiries and recommendations about future sale notices (advising OL to use comprehensive language) are ancillary but pragmatic. Conclusion: Post-liquidation municipal and water tax claims for the period between winding-up order and sale confirmation (on the facts) are not to be foisted on the purchaser in absence of an express stipulation in the sale notice putting the purchaser on notice of encumbrances; liability remains with the OL as part of winding-up expenses to the extent provided by law. Issue 2 - Whether post-liquidation municipal/water taxes are costs of winding up payable in priority under Rule 338 Legal framework: Rule 338 lists costs and expenses properly incurred in preserving, realising or getting in assets of the company as payable out of assets in a specified order of priority. Sections 529A and 530 deal with overriding preferential payments and preferential payments for revenues/taxes due at the relevant date (with a 12-month limitation prior to that date), but do not expressly address post-liquidation charges. Precedent treatment: English and other decisions have recognised that expenses incurred in preserving or realising assets during winding up rank as costs rather than provable debts and are to be paid in priority. Prior authorities treating municipal taxes as unsecured or personal liabilities have also distinguished situations where taxes form part of winding-up costs. Interpretation and reasoning: The Court held that municipal and water tax liabilities that accrued during the period when the OL retained custody to preserve and realise assets are rightly characterised as expenses of winding up - 'expenses for preserving, realising or getting in' the assets. Such items are payable in priority under Rule 338 before distribution to creditors and are distinct from preferential claims contemplated under Section 530 which relate to pre-relevant-date taxes subject to a 12-month limitation. The classification of post-liquidation taxes as winding-up costs is consistent with the OL's duty to protect assets and with the priority scheme of the Rules and Act (costs are paid before preferential claims are considered). Ratio vs. Obiter: Ratio - post-liquidation municipal/water taxes payable to protect/preserve assets qualify as costs of winding up and are payable in priority under Rule 338; Section 530 does not negate this treatment. Obiter - comparisons with other statutory schemes and some foreign authorities are illustrative. Conclusion: Post-liquidation municipal and water taxes incurred to preserve or realise assets of the company are costs of winding up and must be discharged in priority by the OL out of company assets or proceeds of sale, subject to the available realisations. Issue 3 - Effect of 'as is where is whatever there is' clause and OL disclaimers on shifting statutory liabilities to purchaser Legal framework: The principle caveat emptor and authorities dealing with OL sales where purchasers are required to satisfy themselves about title/encumbrances; Transfer of Property Act Section 100 and authorities on enforceability of charges in hands of transferee for value without notice; Companies (Court) Rules and the OL's duty to disclose material encumbrances in sale terms. Precedent treatment: Where sale notices expressly warn purchasers to satisfy themselves about title/encumbrances, courts have refused post-purchase relief. Conversely, where purchasers lacked notice of statutory charges, acquisition for value without notice may protect them against enforcement in hands of transferee unless law otherwise provides. Interpretation and reasoning: The Court differentiated clauses concerning physical condition/quantity from clauses concerning title/encumbrances. An 'as is where is' clause that deals with physical attributes does not, by itself, import constructive notice of statutory charges or encumbrances unless sale terms expressly require prospective purchasers to investigate encumbrances or to accept property subject to all encumbrances. In absence of such express stipulation the OL cannot rely on a generalized disclaimer to transfer statutory obligations to purchaser. Moreover, where municipal statute contains a proviso protecting non-owners/occupiers, a purchaser could reasonably assume protection absent notice to the contrary. Ratio vs. Obiter: Ratio - blanket 'as is where is' disclaimers and disclaimers about quality/quantity do not suffice to transfer post-liquidation statutory liabilities to a purchaser unless the sale terms explicitly state that the purchaser buys subject to encumbrances and must satisfy himself in that regard. Obiter - recommendation that OLs should adopt comprehensive sale clauses to avoid litigation. Conclusion: The 'as is where is' description and general disclaimers in the sale notice did not, on these facts, make the purchaser liable for post-liquidation municipal and water tax arrears; express language on encumbrances would be required to effect such a transfer of liability. Issue 4 - Whether municipal statutory charge attaches to property in hands of transferee for value without notice Legal framework: Section 100 Transfer of Property Act and statutory provisions creating charges; local municipal provision making taxes a first charge but with proviso exempting occupiers who were not owners for periods they were not occupying. Precedent treatment: Authorities hold that no charge is enforceable against property in hands of a transferee for value without notice except where a law expressly provides for enforcement; municipal tax provisions must be read to determine whether they create an enforceable charge against transferees without notice. Interpretation and reasoning: The Court found that the municipal statute did create a first charge but that the proviso limited recoverability against occupiers who were not owners. Absent an express statutory provision rendering arrears enforceable against transferees for value without notice, such arrears cannot be enforced against the purchaser who lacked notice. The Court applied principles from prior decisions emphasizing that constructive notice is a question of fact and cannot be presumed from a general 'as is' clause. Ratio vs. Obiter: Ratio - municipal statutory provisions do not automatically permit enforcement of arrears against a transferee for value without notice unless the statute expressly so provides; the proviso may further immunise a purchaser in certain circumstances. Obiter - factual guidance on assessing notice. Conclusion: On these facts the municipal charge did not render the purchaser liable for post-liquidation arrears absent express statutory provision or notice; consequently the OL remained responsible to meet those arrears as winding-up expenses. Issue 5 - Interaction of Sections 529A/530 and Rules 154/163 with post-liquidation claims Legal framework: Sections 529A and 530 set out overriding and preferential payments with temporal limits for revenues/taxes; Rule 154 fixes value of debts at the date of winding up; Rule 163 prescribes communication of acceptance/rejection of proofs. Precedent treatment: These provisions have been interpreted as governing pre-liquidation debts and priorities, not as excluding costs properly incurred after winding up in preserving assets. Interpretation and reasoning: The Court held Sections 529A and 530 concern preferential claims as at the relevant date (and, in the case of taxes, those due and payable within 12 months before that date) and therefore do not preclude classification of post-liquidation taxes as costs of winding up. Rule 154 relates to valuation of claims at winding-up date and is inapplicable to post-liquidation liabilities; Rule 163 requires communication and grounds when rejecting proofs but does not immunise the OL from liability for costs properly incurred post-liquidation. The Rule 338 priority for costs remains applicable. Ratio vs. Obiter: Ratio - Sections 529A/530 and Rules 154/163 do not operate to bar the payment of post-liquidation taxes that properly constitute expenses of winding up payable in priority under Rule 338. Obiter - procedural obligations on OL in communicating rejections and the opportunity to appeal under municipal statute. Conclusion: Sections 529A and 530 and Rules 154/163 do not preclude the OL's liability to discharge post-liquidation taxes which are properly characterised as winding-up expenses payable in priority under Rule 338; consequently the High Court's treatment is sustained. Overall Disposition The OL was obliged to discharge the municipal property and water tax arrears accruing during the post-liquidation custodial period up to confirmation of sale as expenses of winding up payable in priority; the purchaser could not be held liable for those arrears on the facts because the sale notice did not expressly require purchasers to satisfy themselves as to encumbrances and the municipal statute and transfer principles did not allow enforcement against a transferee for value without notice.