Official Liquidator Liable for Post-Liquidation Taxes: Supreme Court Judgment Analysis

Date of the Judgment: 04 May 2023

Citation: 2023 INSC 416

Judges: Justice Dinesh Maheshwari, Justice Aniruddha Bose

Can an Official Liquidator (OL) be held responsible for paying property and water taxes that accumulate on a company’s assets after a winding-up order but before the assets are sold? The Supreme Court of India recently addressed this question, clarifying the liabilities of an OL during the liquidation process. The core issue revolves around whether these post-liquidation dues should be considered part of the liquidation costs and therefore prioritized over other debts. This judgment, authored by Justice Dinesh Maheshwari, with Justice Aniruddha Bose concurring, provides important insights into the responsibilities of an OL in managing a company’s assets during liquidation.

Case Background

The case involves IISCO Ujjain Pipe and Foundry Company Limited, which was declared a sick company and referred to the Board for Industrial and Financial Reconstruction (BIFR). The BIFR recommended the company’s winding up, and the High Court ordered the winding up on 10 July 1997. The Official Liquidator (OL) was appointed to take possession of the company’s assets.

On 04 April 2003, the Company Court ordered the sale of the company’s assets on an “as is where is whatever there is” basis. A sale notice was issued on 09 May 2003, inviting offers. The assets were eventually sold to Nagendra Jain for Rs. 20.50 crore, and the sale was confirmed on 04 July 2003. Subsequently, respondent No. 3 was nominated in place of Nagendra Jain as the purchaser.

After the sale, the OL invited claims from the company’s creditors. Ujjain Nagar Palika Nigam (the Nigam), respondent No. 1, filed claims for property tax arrears of Rs. 2,79,955 for 1996-1997 and Rs. 4,63,69,137 for 1997-1998 to 2003-2004, and for water tax arrears of Rs. 11,14,612 for the period from 01 June 1996 to 31 October 2005. The OL admitted the pre-liquidation claims but rejected the post-liquidation claims, leading to the present dispute.

Timeline

Course of Proceedings

The Ujjain Nagar Palika Nigam (Nigam) challenged the partial rejection of its claims by filing company applications before the Company Court at Calcutta. The Company Court framed the issue of whether post-winding-up claims could be outright rejected.

The Company Court ruled that the OL’s liability was not restricted to claims until the date of the winding-up order. It held that post-liquidation liabilities should be treated as part of the winding-up costs and prioritized over other liabilities. The Company Court set aside the rejection notice but allowed the OL to appeal against the demands within thirty days. The Company Court directed the OL to consider the claims of the Nigam within eight weeks from the receipt of the order in appeal under Section 184 of the Madhya Pradesh Municipal Corporation Act, 1956.

The OL appealed to the Division Bench of the High Court, which upheld the Company Court’s decision. The Division Bench held that the auction purchaser was not liable for post-liquidation charges because the sale notice did not explicitly mention any liability towards arrears due to the Nigam. The Division Bench also stated that Section 530 of the Companies Act, 1956, and Rule 154 of the Companies (Court) Rules, 1959, were not applicable in this case. The Division Bench directed the OL to issue future sale notices in comprehensive language to avoid complications.

Legal Framework

The Supreme Court considered the following key legal provisions:

• Section 529A of the Companies Act, 1956: This section deals with overriding preferential payments, stating that workmen’s dues and debts due to secured creditors shall be paid in priority to all other debts.
• Section 530 of the Companies Act, 1956: This section outlines preferential payments, including revenues, taxes, cesses, and rates due to the government or local authority within twelve months before the winding-up date. It specifies that these dues are to be paid in priority to all other debts, subject to Section 529A. The relevant date for determining these dues is the date of the winding-up order.
  
  “530. Preferential payments. – (1) In a winding up subject to the provisions of section 529A, there shall be paid in priority to all other debts – (a) all revenues taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub -section (8), and having become due and payable within the twelve months next before that date; “
• Rule 154 of the Companies (Court) Rules, 1959: This rule specifies that the value of debts and claims against the company should be estimated as of the date of the winding-up order.
  
  “R.154. Value of debts – The value of all debts and claims against the company shall, as far as is possible, be estimated according to the value thereof at the date of the order of the winding -up of the company or where before the presentation of the petition for winding up, a resolution has been passed by the company for voluntary winding -up, at the date of the passing of such resolution.”
• Rule 163 of the Companies (Court) Rules, 1959: This rule outlines the procedure for the liquidator to accept or reject a proof of debt, requiring written communication to the creditor.
  
  “R.163 . Acceptance or rejection of proof to be communicated – After such investigation as he may think necessary, the liquidator shall in wri ting admit or reject the proof in whole or in part. Every decision of the Liquidator accepting or rejecting a proof, either wholly or in part, shall be communicated to the creditor concerned by post under certificate of posting where the proof is admitted and by registered post for acknowledgement whe re the proof is rejected wholly or in part, provided that it shall not be necessary to give notice of the admission of a claim to a creditor who has appeared before the Liquidator and the acceptance of whose claim had been communicated to him or his agent in writing at the time of acceptance. Where the Liquidator rejects a proof, wholly or in part, he shall state the grounds of the rejection to the creditor in Form No.69, Notice of admission of proof shall be in Form No.70.”
• Rule 338 of the Companies (Court) Rules, 1959: This rule specifies the order of priority for payments from the company’s assets in a winding-up by the Court. It includes the costs and expenses of preserving, realizing, or getting in the assets.
  
  “R.338 . Cost and expenses payable out of the assets in a winding -up by the Court. – (1) The assets of a company in a winding -up by the Court remaining after payment of the fees and expenses properly incurred in preserving, realising or getting in the assets including, wher e the company has previously commenced to be wound -up voluntarily, such remuneration, cost and expenses as the Court may allow to the liquidator in such voluntary winding -up, shall, subject to any order of the Court and to the rights of secured creditors i f any, be liable to the following payments which shall be made in the following order of priority, namely : – First. -the taxed costs of the petition including the taxed costs of any person appearing on the petition, whose costs are allowed by the Court.”
• Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956: This section states that taxes on land or buildings are a first charge on the property. It also provides that arrears of tax are not recoverable from an occupier who is not the owner if the arrears are from a period when the occupier was not in occupation.
  
  “185. Liability of buildings, lands, etc., for taxes. – All sums due from any person in respect of taxes on any land or building shall, subject to prior payment of any land revenue in respect of it due to the government, be a first charge upon the said land or building and upon any movable property found within or upon such land or building and belonging to the said person. Provided that no arrears of any such tax shall be recoverable from any occupier who is not the owner, if such arrears are for a period during which the occupier was not in occupation.”
• Section 100 of the Transfer of Property Act, 1882: This section deals with charges on immovable property and states that no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge.
  
  “100. Charges .—Where immovable property of one person is by act of partie s or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property, and all the provisions hereinbefore contained which apply to a simple mo rtgage shall, so far as may be, apply to such charge. Nothing in this section applies to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust, and, save as otherwise expressly provided by any law for th e time being in force, no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge.”

Arguments

Arguments by the Official Liquidator (Appellant):

• The OL argued that he was only liable for taxes that accrued until the date of the winding-up order and became payable within one year thereof, as per Section 530 of the Companies Act, 1956.
• He contended that post-liquidation taxes should not be treated as part of the cost of winding up, as this would prejudice pre-liquidation creditors.
• The OL stated that the assets of the company were in the custody of the Court, and he did not carry on any business or use water for profit after liquidation.
• He emphasized that the sale was on an “as is where is whatever there is” basis, implying that the purchaser would be responsible for any encumbrances, including statutory dues.
• The OL relied on the principle that when an Official Liquidator sells property under court orders, there is no guarantee or warranty, and the purchaser must satisfy themselves about encumbrances. Reliance was placed on United Bank of India v. Official Liquidator and Ors.: 79 Company Cases 262 [ = (1994) 1 SCC 575 ].
• The OL argued that the High Court should not have given benefit to respondent No. 3, the auction purchaser, in view of the terms and conditions of sale of the assets of the company in liquidation.

Arguments by Ujjain Nagar Palika Nigam (Respondent No. 1):

• The Nigam argued that the OL was liable for both pre- and post-liquidation rates and taxes.
• It contended that, as per Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956, it was a secured creditor, and the municipal taxes were a first charge on the property.
• The Nigam argued that the OL was required to give reasons for rejecting the claim, which he had not done.
• It submitted that the claims raised by respondent No.1 constitute “liquidation expenses ”, being the expenses that had to be paid by the appellant OL to maintain the property while being in his custody ; and, t herefore, the obligation is to be met out of the value realised from the sale of assets of the company.
• The Nigam contended that in terms of Rule 338 of the Rules of 1959, the expenses incurred by the OL for “preserving, realising or getting in” the assets of the company are required to be paid in priority and the said Rule provides for the order of preference thereafter in relation to other costs and expenses payable out of the assets of the company.
• The Nigam contended that preferential payments prescribed in Section 530 of the Companies Act are for payment of specified claims thereunder and that too after payment of costs and expenses of winding up that are properly incurred by the appellant and which are paid in priority.
• The Nigam argued that Section 530 relates to claims for pre -liquidation period for which, there is a need for prescribing priority but, the said provision has no application for the expenses incurred by OL during post -liquidation period, which are required to be paid in priority.
• The Nigam relied on Section 185 of the M.P. Act of 1956, arguing that the proviso expressly states that arrears of tax are not recoverable from any occupier who is not the owner, if the arrears are of the period when such occupier was not in occupation.
• It submitted that in terms of Section 520 of the Companies Act, the municipal taxes as sought to be claimed by respondent No.1 would be costs of winding up ; and the appellant being in possession of the assets , is obliged to pay the mu nicipal taxes, which ought to have been paid to protect and preserve the property.

Arguments by the Auction Purchaser (Respondent No. 3):

• The auction purchaser argued that he was liable for property tax and water tax only from the date of confirmation of sale in his favor, i.e., from 04 July 2003.
• He contended that he was neither the owner nor the occupier until 04 July 2003, and therefore, the OL was liable for taxes until then.
• The auction purchaser submitted that the Companies Act and the Rules of 1959 do not impose any obligation on purchaser to pay dues that relate to period between the date of order of winding up and date of sale confirmation.
• He argued that the claims in the present case are post -liquidation charges or costs and are, therefore, expenses of winding up , liable to be borne out of proceeds of liquidation, if any ; and to the extent that they remain unpaid after exhausting the proceeds of liquidation, are to abate. Reliance was placed on the decision in In re Toshoku Finance UK plc: [2002] 1 WLR 671.
• The auction purchaser referred to Section 100 of Transfer of Property Act, 1882 as also to the decisions of this Court in Ahmedabad Municipal Corporation v. Haji Abdul Gafur Haji Hussenbhai: (1971) 1 SCC 757 and AI Champ dany Ltd. v. Official Liquidator and Anr.: (2009) 4 SCC 486 to submit that auction purchaser without notice and in absence of any provision in terms of sale or any statutory provision could not be made liable for such arrears of tax.
• The auction purchaser contended that the dues in relation to municipal taxes in terms of the said M.P. Act of 1956 do not create any encumbrance or charge on the property such as t o run with property for all times and under all circumstances as held in AI Champ dany Ltd. (supra).
• The auction purchaser submitted that there is no obligation that has been created or could be assumed on account of the terms and conditions of the sale carried out by the appellant , particularly when there was no express provision in the sale notice that the liability of charges on account of property tax and wa ter tax were to be borne by the purchaser.
• The auction purchaser argued that the stipulation of “ as is where is and whatever there is ” pertains to the physical properties of an asset and could not be construed as indicative of constructive notice of charge or encumbrance .
• The auction purchaser contended that by virtue of Section 185 of the M.P. Act of 1956 , arrears could only be claimed from a person who was an occupier at relevant time and from no one else and, therefore , the question of auction purchaser making any inquiries or foisting upon him any constructive knowledge does not arise. Reliance was placed on the decision in Delhi Development Authority v. Kenneth Builders and Developers Pvt. Ltd. and Ors.: (2016) 13 SCC 561.

Submissions by Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for adjudication:

1. Whether the claims made by the Ujjain Nagar Palika Nigam towards property tax and water tax pertaining to the post-liquidation period, from the date of the order of winding up until the date of confirmation of sale of assets to the auction purchaser, are admissible against the Official Liquidator.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• United Bank of India v. Official Liquidator and Ors.: 79 Company Cases 262 [ = (1994) 1 SCC 575 ] (Supreme Court of India): This case was distinguished due to differences in the terms and conditions of sale. The Court noted that in the cited case, the sale notice had specific stipulations regarding encumbrances, which were absent in the present case.
• Haryana Financial Corporation v. Rajesh Gupta: (2010) 1 SCC 655 (Supreme Court of India): This case was distinguished as it involved a sale by a financial corporation, not an Official Liquidator, and the corporation was deemed to be exercising the rights of an owner.
• UT Chandigarh Administration and Anr. v. Amerjeet Singh and Ors.: (2009) 4 SCC 660 (Supreme Court of India): This case, concerning consumer complaints about amenities in auctioned sites, was found to be irrelevant to the present matter.
• Punjab Urban Planning and Development Authority v. Raghu Nath Gupta: (2012) 8 SCC 197 (Supreme Court of India): This case, about the levy of interest and penalties for delayed payments, was also found to be irrelevant to the present matter.
• Ahmedabad Municipal Corporation v. Haji Abdul Gafur Haji Hussenbhai: (1971) 1 SCC 757 (Supreme Court of India): This case was cited to emphasize that no charge is enforceable against a transferee for consideration without notice, unless otherwise provided by law.
• AI Champdany Ltd. v. Official Liquidator and Anr.: (2009) 4 SCC 486 (Supreme Court of India): This case was cited to highlight that municipal tax dues do not create an encumbrance or charge on the property and are considered a personal liability.
• Delhi Development Authority v. Kenneth Builders and Developers Pvt. Ltd. and Ors.: (2016) 13 SCC 561 (Supreme Court of India): This case was relied upon by the auction purchaser to argue that arrears of tax could only be claimed from the occupier at the relevant time.
• Municipal Board, Cawnpore v. Roop Chand Jain and Anr.: AIR 1940 All 456 (Allahabad High Court): This case was cited in Ahmedabad Municipal Corporation (supra) for the proposition that a purchaser at auction sale takes the property subject to all the defects of title and that the doctrine of caveat emptor applies to such purchaser.
• In re Toshoku Finance UK plc: [2002] 1 WLR 671 (English Decision): This case was cited by the auction purchaser to argue that post-liquidation charges are expenses of winding up and are to be borne out of the proceeds of liquidation.

The Supreme Court also considered the following legal provisions:

• Section 529A of the Companies Act, 1956
• Section 530 of the Companies Act, 1956
• Rule 154 of the Companies (Court) Rules, 1959
• Rule 338 of the Companies (Court) Rules, 1959
• Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956
• Section 100 of the Transfer of Property Act, 1882

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• United Bank of India v. Official Liquidator and Ors.: 79 Company Cases 262 [ = (1994) 1 SCC 575 ]* was distinguished by the Court due to the specific terms and conditions of sale in that case, which were absent in the present case.
• Haryana Financial Corporation v. Rajesh Gupta: (2010) 1 SCC 655* was distinguished as it involved a sale by a financial corporation, not an Official Liquidator.
• UT Chandigarh Administration and Anr. v. Amerjeet Singh and Ors.: (2009) 4 SCC 660* and Punjab Urban Planning and Development Authority v. Raghu Nath Gupta: (2012) 8 SCC 197* were found to be irrelevant to the present matter.
• Ahmedabad Municipal Corporation v. Haji Abdul Gafur Haji Hussenbhai: (1971) 1 SCC 757* and AI Champdany Ltd. v. Official Liquidator and Anr.: (2009) 4 SCC 486* were relied upon to emphasize that no charge is enforceable against a transferee for consideration without notice.
• Delhi Development Authority v. Kenneth Builders and Developers Pvt. Ltd. and Ors.: (2016) 13 SCC 561* was relied upon by the auction purchaser to argue that arrears of tax could only be claimed from the occupier at the relevant time.
• In re Toshoku Finance UK plc: [2002] 1 WLR 671* was relied upon by the auction purchaser to argue that post-liquidation charges are expenses of winding up and are to be borne out of the proceeds of liquidation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The absence of clear stipulations in the sale notice regarding the transfer of liability for post-liquidation taxes to the purchaser.
• The interpretation of post-liquidation dues as expenses incurred for preserving the assets of the company, which should be prioritized as part of the winding-up costs.
• The principle that the Official Liquidator, as the custodian of the assets, is responsible for the liabilities accrued during their possession, until the sale is confirmed.
• The court’s interpretation of Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956, and its interaction with the Companies Act, 1956 and the Companies (Court) Rules, 1959.
• The court’s reliance on Rule 338 of the Companies (Court) Rules, 1959, which prioritizes the costs and expenses of preserving, realizing, or getting in the assets.

Decision and Ratio

The Supreme Court dismissed the appeals filed by the Official Liquidator, upholding the decision of the Division Bench of the High Court. The Court held that the Official Liquidator was liable for the property and water taxes accrued on the company’s assets from the date of the winding-up order until the date of confirmation of sale. The Court also held that these post-liquidation dues are part of the costs of winding up and should be paid in priority to other debts.

Ratio Decidendi:

• Official Liquidator’s Liability: The Official Liquidator is liable for post-liquidation taxes and other dues that arise during the period the assets are under their control and until the sale is confirmed.
• Liquidation Costs: Post-liquidation taxes are considered part of the costs of winding up and are to be paid in priority over other debts.
• Sale Terms: The terms of the sale notice must explicitly state if the purchaser is to be liable for post-liquidation dues. In the absence of such explicit terms, the liability remains with the Official Liquidator.
• Interpretation of Statutes: The Companies Act, 1956 and the Companies (Court) Rules, 1959, must be interpreted harmoniously with other relevant statutes, such as municipal corporation acts, to ensure that the winding-up process is fair and efficient.

Flowchart of Liquidation and Tax Liability

Implications of the Judgment

This judgment has significant implications for Official Liquidators, auction purchasers, and creditors involved in company liquidations:

• For Official Liquidators:
  • Official Liquidators must be aware that they are liable for post-liquidation taxes and other dues until the sale of the assets is confirmed.
  • They should ensure that sale notices clearly specify the liabilities that the purchaser will assume.
  • They must prioritize the payment of post-liquidation taxes as part of the costs of winding up.
  • They must maintain proper records of all post-liquidation liabilities and ensure that all claims are properly investigated.
• For Auction Purchasers:
  • Auction purchasers should carefully scrutinize sale notices and verify if they are liable for any post-liquidation dues.
  • They should be aware that the “as is where is” clause may not necessarily cover all encumbrances and statutory dues.
  • They should seek legal advice to understand their liabilities before participating in auctions.
• For Creditors:
  • Creditors should be aware that post-liquidation taxes have priority over other debts and should be paid first from the proceeds of the sale of assets.
  • They should file their claims promptly and ensure that all claims are properly documented.
  • They should monitor the liquidation process to ensure that their claims are properly considered.

Conclusion

The Supreme Court’s judgment in Official Liquidator vs. Ujjain Nagar Palika Nigam & Ors. clarifies the liability of an Official Liquidator for post-liquidation taxes. The judgment emphasizes that the Official Liquidator is responsible for the upkeep and maintenance of the company’s assets until the sale is confirmed and, therefore, is liable for the taxes and other dues that accrue during that period. This decision provides important guidance for the winding-up process and ensures that statutory dues are given the priority they deserve. The judgment underscores the need for clear and comprehensive sale notices and the importance of considering post-liquidation dues as part of the costs of winding up. This decision serves as a reminder of the importance of adhering to the principles of fairness and efficiency in the liquidation process and the need for all parties to be aware of their rights and liabilities.