2025 (10) TMI 126 - HC - IBC

Refusal to transfer leasehold factory units upheld where outstanding property tax is statutory charge; purchaser takes subject to encumbrances

Cotton Casuals India Private Limited & Ors. Versus The State Of West Bengal & Ors.

The HC upheld the Corporation's refusal to mutate four leasehold factory units to the petitioners on grounds of outstanding property tax, ruling the ... Correctness in withholding or rejecting the Petitioners’ applications for mutation of the premises on the ground of non-payment of such outstanding property tax - Petitioners, being auction purchasers of the premises in question, are liable to discharge the arrears of property tax pertaining to the period prior to the auction sale and delivery of possession or not. Whether the Respondent Corporation is justified in withholding or rejecting the Petitioners’ applications for mutation of the premises on the ground of non- payment of such outstanding property tax? - HELD THAT:- In the present case, the Respondent Corporation, acting under the post- amendment statutory provision, was fully justified in refusing to effect mutation on account of the outstanding property tax dues. Such refusal is therefore lawful, reasonable, and entirely in conformity with the statutory framework. Whether the petitioners, being auction purchasers of the premises in question, are liable to discharge the arrears of property tax pertaining to the period prior to the auction sale and delivery of possession? - HELD THAT:- Where a statutory charge is created on the property, as in the case of property tax under the KMC Act, the Respondent corporation may either submit its claim before the Official Liquidator under the IBC or enforce the charge independently through the statutory mechanism. In such cases, there is no inconsistency between the IBC and the KMC Act, and Section 238 of the IBC is not attracted - If the Respondent Corporation opts to recover dues through the statutory mechanism, the auction purchaser stands on the same footing as any other purchaser. The material consideration is not the statute under which the auction is held, but whether the purchaser was put on notice of existing liabilities. The liability of an auction purchaser is no longer res integra. In Ahmedabad Municipal Corporation v. Haji Abdul Gafur Haji Hussenbhai [1971 (3) TMI 89 - SUPREME COURT] the Hon’ble Supreme Court held that a purchaser takes the property subject to caveat emptor. However, subsequently in AI Champdany [2009 (2) TMI 921 - SUPREME COURT], the Court clarified that unless the purchaser is specifically put on notice of statutory dues, or the sale notice expressly provides that the property is subject to such liabilities, the burden of such dues cannot be fastened upon him. This Court is of the considered opinion that, irrespective of whether the sale is conducted under the IBC or under any other statute, an auction purchaser who had no notice of pre-sale liabilities cannot be saddled with such dues. The doctrine of caveat emptor undoubtedly applies to auction sales, but its application is contingent upon the purchaser having been put to sufficient notice of existing liabilities. It is, therefore, necessary to examine the terms and conditions of the Sale Notice and the Expression of Interest to determine whether the Petitioner was put to notice of the outstanding dues or not. This Court is of the considered view that the Petitioner, being the auction purchaser of the premises in question, is liable to pay the outstanding property tax dues. The Official Liquidator through Sale Notice and EOI has made it very evident and clear that all the bidders are supposed to make their respective bids based on their own investigation and due diligence - Further Section 232 of the KMC Act makes the property tax dues as first charge on the property and hence make it an encumbrance attached to the property. Hence, the Petitioner is liable to make the payment towards the outstanding property tax dues for the pre- liquidation period also. This Court finds no illegality, arbitrariness, or infirmity in the letters dated 18.11.2024 issued by the Respondent Corporation. The refusal to grant mutation of the four leasehold factory units, being Nos. A-201, A-202, A-301 and A-302, admeasuring in aggregate 45,208 sq. ft., together with six car parking spaces, situated at Paridhan Garment Park, 19 Canal South Road, Tangra, Kolkata – 700015, West Bengal, in the name of the Petitioners, on account of outstanding property tax and other statutory dues, is fully justified and entirely in accordance with law. Petition dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the municipal corporation was justified in withholding or refusing mutation of leasehold factory units on the ground of non-payment of outstanding property tax and related interest/penalty. 2. Whether auction purchasers (buyers at e-auction/sale in liquidation) are liable to discharge arrears of property tax relating to the period prior to sale and delivery of possession, where the sale was conducted on an 'as is where is, whatever there is and without recourse' basis and the Expression of Interest/Sale Notice required bidders to undertake independent due diligence. ISSUE-WISE DETAILED ANALYSIS - ISSUE 1: VALIDITY OF WITHHOLDING MUTATION FOR NON-PAYMENT OF OUTSTANDING PROPERTY TAX Legal framework: Sections governing mutation procedure and statutory first charge under the municipal statute, including the post-amendment proviso permitting refusal of mutation where there is arrear of dues of the transferor or predecessor-in-interest. Precedent treatment: Courts have recognised municipal power to withhold mutation where statute so provides and where arrears constitute a charge on the property. Interpretation and reasoning: The municipal statute, as amended, expressly preserves the corporation's power to refuse mutation in the presence of arrears. The statutory scheme treats property tax arrears as enforceable charges and empowers municipal recovery mechanisms; refusal to mutate until dues are cleared is therefore consistent with statutory design. Ratio vs. Obiter: Ratio - refusal to effect mutation on account of outstanding statutory dues is lawful where statute permits such refusal and where arrears constitute a charge on the property. Conclusion: The Corporation's withholding of mutation until outstanding property tax (including interest/penalty) is paid was lawful, reasonable and in conformity with the municipal statute. ISSUE-WISE DETAILED ANALYSIS - ISSUE 2: LIABILITY OF AUCTION PURCHASER FOR PRE-SALE PROPERTY TAX ARREARS Legal framework: (a) Insolvency law providing the liquidation process, requirement for creditors to file claims and distribution of sale proceeds under the statutory waterfall, and the statutory non-obstante clause; (b) municipal statute creating a statutory first charge for property tax on land/buildings. Precedent treatment (general): Higher court authorities establish that assets sold in liquidation are typically offered on 'as is where is' basis, placing onus of due diligence on purchasers; other authorities have held that where municipal dues do not constitute a charge they rank as unsecured claims recoverable via the liquidation process. Interpretation and reasoning: - Interaction of statutes: Where municipal law creates a statutory first charge on property (property tax as a first charge), the municipal authority may independently enforce that charge notwithstanding liquidation under insolvency law; there is no necessary inconsistency attracting the non-obstante provision of the insolvency statute. - Effect of 'as is where is' sale terms and EOI clauses: The Sale Notice and EOI repeatedly and explicitly placed responsibility for independent investigation and due diligence on bidders and stated assets were sold 'as is where is, whatever there is and without recourse'; clauses further indicated reserve price exclusive of taxes and disclaimed warranties/indemnities. Such terms, when properly incorporated in the sale process, put bidders on notice that encumbrances and statutory dues may attach to the property and that the purchaser alone bears the risk. - Doctrine of caveat emptor and its limits: While caveat emptor applies to auction sales, its application depends on notice; where the sale documents and regime sufficiently warn bidders, purchasers are presumed to have conducted due diligence and acquire the property subject to existing encumbrances that run with the property. - Distinguishing prior authorities: Decisions treating municipal dues as unsecured claims (and thus payable out of liquidation proceeds) are distinguishable where a municipal statute expressly creates a charge on the property. Similarly, principles protecting resolution applicants under a revival/resolution plan do not automatically apply to purchasers in liquidation, who buy assets without the benefit of a 'clean slate' afforded to plan implementers. Ratio vs. Obiter: Ratio - where a municipal statute creates a first charge on property for unpaid property tax, and where sale documents place bidders on notice via clear 'as is where is' clauses and due diligence requirements, an auction purchaser in liquidation acquires the asset subject to such statutory charge and is liable to discharge such arrears; the insolvency statute's non-obstante clause does not extinguish an extant statutory charge enforceable against the property. Conclusion: The auction purchasers, having acquired the property under explicit 'as is where is' sale terms which required them to undertake independent due diligence, and given the statutory first charge conferred by the municipal law, are liable to pay the outstanding property tax arrears pertaining to the pre-sale period; the municipal authority was entitled to demand clearance of such arrears before effecting mutation. ADDITIONAL ANALYTICAL POINTS / CROSS-REFERENCES 1. On the interaction of insolvency and municipal laws: Where municipal dues are secured by a statutory charge on the property, the municipal authority may either (a) lodge its claim before the liquidator and participate in distribution under the insolvency waterfall, or (b) enforce the statutory charge independently; choice of mechanism does not create a conflict rendering municipal enforcement impermissible. 2. On the efficacy of sale-document disclosures: Explicit EOI/Sale Notice clauses (disclaimer, 'as is where is', reserve price exclusive of taxes, obligation to verify title/encumbrances) operate to place bidders on constructive notice; absent express contrary term in sale contract, purchaser bears liability for encumbrances that run with the property. 3. On applicability of authorities relied upon by purchaser: Decisions that relieve auction purchasers of pre-sale municipal dues are distinguishable when the municipal statute creates a first charge; similarly, protections accorded to resolution applicants under an approved plan are inapplicable to purchasers in a liquidation sale. FINAL CONCLUSION The municipal corporation lawfully refused mutation until outstanding property tax (including interest/penalty) was cleared; the auction purchasers are liable for pre-sale property tax arrears due to the statutory first charge and the clear 'as is where is' sale terms requiring bidders' independent due diligence. The demand for arrears and the refusal to mutate were held to be in accordance with law.