Supreme Court clarifies liability for electricity dues of previous owners on auction purchasers (2023)

Date of the Judgment: May 19, 2023
Citation: 2023 INSC 560
Judges: Dr Dhananjaya Y Chandrachud, CJI, Hima Kohli, J, Pamidighantam Sri Narasimha, J
Can an auction purchaser be held liable for the unpaid electricity dues of the previous owner of a property? The Supreme Court of India recently addressed this crucial question, clarifying the legal position on the matter. This judgment is significant for both electricity distribution companies and those acquiring properties through auction sales. The core issue revolves around whether new owners are obligated to pay the outstanding electricity bills of former owners before receiving a new connection. The Supreme Court bench comprised Chief Justice of India Dr. Dhananjaya Y Chandrachud, Justice Hima Kohli, and Justice Pamidighantam Sri Narasimha, with the majority opinion authored by the Chief Justice.

Case Background

The cases before the Supreme Court involved a common scenario: electricity supply was disconnected due to unpaid dues by previous owners. These owners had often taken loans using their properties as security, and in many cases, the properties were sold through auction sales, typically on an “as is where is” basis. The new owners, upon applying for electricity connections, were denied unless they cleared the previous owners’ dues. This denial was based on powers granted by subordinate legislations, notifications, electricity supply codes, or state regulations. The new owners then filed petitions under Article 226 of the Constitution before the High Courts, leading to the appeals before the Supreme Court.

Timeline

Legal Framework

The court examined the legal framework governing electricity supply, including:

• The Electricity Act 1910: This act governed the supply and use of electrical energy in India before the 2003 Act. Section 2(c) defined “consumer,” and Section 24 empowered licensees to disconnect electricity for non-payment.
• The Electricity (Supply) Act 1948: This act mandated state governments to constitute State Electricity Boards and entrusted them with administering the grid system. Section 49 allowed boards to supply electricity on terms and conditions.
• The Electricity Regulatory Commissions Act 1998: This act aimed to distance the government from tariff determination and created regulatory commissions.
• The Electricity Act 2003: This act consolidated previous laws, promoting private sector participation and vesting regulatory responsibilities with commissions. Section 2(15) defines “consumer,” Section 43 casts a Universal Service Obligation (USO) on licensees, and Section 50 empowers State Commissions to specify Electricity Supply Codes. Section 56 allows disconnection for non-payment.

Arguments

Electric Utilities’ Submissions:

• The Universal Service Obligation (USO) under Section 43 of the 2003 Act is not absolute and is subject to compliances like payment of dues.
• Supply of electricity is with respect to premises, not just the individual, making the premises the identified place for supply, regardless of ownership changes.
• The regulatory regime allows for recovery of arrears from subsequent owners through statutory rules and conditions of supply.
• Electricity arrears can be treated as a charge over the premises, allowing recovery from new owners.
• Section 56(2) of the 2003 Act only limits the power to disconnect, not other avenues of recovery.
• Auction sales on an “as is where is” basis imply that purchasers acknowledge all liabilities, including electricity dues.

Auction Purchasers’ Submissions:

• The USO under Section 43 is absolute, and the “price” mentioned only refers to the cost of electricity, not past dues.
• Supply of electricity is with respect to the consumer, not the premises, with “premises” only fixing the location of supply.
• Recovery of arrears from new owners is not authorized by the 1910, 1948, or 2003 Acts and cannot be done through subordinate legislation.
• Electricity arrears do not constitute a charge on the property and are simply unsecured debts.
• Section 56 of the 2003 Act limits recovery to two years, and conditions of supply cannot override this.
• “As is where is” condition applies only to physical properties, not to claims that are not encumbrances.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether the Universal Service Obligation under Section 43 of the 2003 Act is linked to the premises to which the connection is sought.
2. Whether a connection of electricity supply sought by an auction-purchaser comprises a reconnection or a fresh connection.
3. Whether the power to recover arrears of a previous owner or occupier from an auction-purchaser of the premises falls within the regulatory regime of the 2003 Act.
4. Whether the power to enable the recovery of arrears of the previous owner or occupier from an auction-purchaser can be provided through subordinate legislation by the State Commissions.
5. Whether the 1910 Act, 1948 Act, and the 2003 Act have express provisions enabling the creation of a charge or encumbrance over the premises.
6. Whether the statutory bar on recovery of electricity dues after the limitation of two years provided under Section 56(2) of the 2003 Act will have an implication on civil remedies of the Electric Utilities to recover such arrears.
7. What is the implication of an auction-sale of premises on “as is where is” basis, with or without reference to electricity arrears of the premises?

Treatment of the Issue by the Court

Authorities

The court considered the following cases and legal provisions:

Judgment

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

How each authority was viewed by the Court?

• Isha Marbles v. Bihar State Electricity Board [CITATION] was distinguished. The court found that the ruling in Isha Marbles was not applicable in cases where there were specific statutory provisions or conditions of supply that allowed for recovery of dues from subsequent owners.
• Ahmedabad Electricity Co. Ltd. v. Gujarat Inns (P) Ltd [CITATION] was also distinguished. The court clarified that the ruling in this case was regarding fresh connections and not the validity of statutory regulations for recovery of dues.
• Hyderabad Vanaspathi Ltd v. Andhra Pradesh State Electricity Board [CITATION] was followed, affirming that terms and conditions of supply are statutory in nature.
• Dakshin Haryana Bijli Vitran Nigam Ltd v. M/s Paramount Polymers Pvt Ltd [CITATION] was followed, highlighting that Isha Marbles cannot be applied when there are specific clauses for recovery.
• Paschimanchal Vidyut Vitran Nigam Limited v. DVS Steels and Alloys Private Limited [CITATION] was followed, emphasizing that licensees can insist on fulfilling statutory conditions of supply.
• Telangana State Southern Power Distribution Co. Ltd. v. Srigdhaa Beverages [CITATION] was followed, reiterating that electricity dues are statutory and cannot be waived in “as is where is” sales.

What weighed in the mind of the Court?

The Supreme Court emphasized the importance of balancing public interest with the rights of auction purchasers. The court recognized that electricity is a public good and that Electric Utilities need to recover costs to maintain infrastructure. However, the court also acknowledged the plight of auction purchasers who might be burdened with past dues. The court emphasized that the interpretation of laws must foster the position that electricity is a public good while also protecting the interests of consumers and the financial health of distribution licensees. The court also noted that the “as is where is” clause in auction sales puts the onus on purchasers to conduct due diligence.

Logical Reasoning

The court also considered alternative interpretations, such as considering the supply of electricity as purely contractual, but rejected them in favor of upholding the statutory powers of the Electric Utilities to recover dues.

The court’s decision was based on a step-by-step analysis of the legal provisions, relevant precedents, and the specific facts of each case. The court emphasized the need to balance the interests of both the Electric Utilities and the auction purchasers, ensuring that the law promotes the development of the electricity industry while protecting consumers.

The majority opinion was delivered by Chief Justice of India Dr. Dhananjaya Y Chandrachud.

Key Takeaways

• Auction purchasers are generally liable for the electricity dues of previous owners if the statutory rules or conditions of supply authorize it.
• The “as is where is” clause in auction sales implies that purchasers acknowledge all liabilities.
• Electricity dues do not automatically become a charge on the property unless specifically provided by law.
• Section 56(2) of the 2003 Act only limits the power to disconnect electricity, not other avenues of recovery.
• The duty to supply electricity is not absolute and is subject to statutory regulations.

Directions

The Supreme Court directed the Electric Utilities to waive the outstanding interest accrued on the principal dues from the date of application for supply of electricity by the auction purchasers, to balance the equities and ensure substantial justice.

Development of Law

This judgment clarifies that while the Universal Service Obligation (USO) under Section 43 of the Electricity Act 2003 is not absolute, the duty to supply electricity is with respect to the consumer and not the premises. It establishes that a new connection sought by an auction purchaser is a fresh connection and not a reconnection. The court also held that State Commissions have the power to make regulations for recovery of electricity arrears from new owners and that such regulations have statutory force. However, the court also clarified that electricity dues do not automatically become a charge on the property unless explicitly stated by law. The judgment also reiterated that the limitation period under Section 56(2) only applies to the power of disconnection, not to other avenues of recovery. Finally, the court clarified the implications of the “as is where is” clause in auction sales, stating that purchasers are deemed to acknowledge all liabilities, including electricity dues.

Conclusion

The Supreme Court’s judgment provides much-needed clarity on the liability for electricity dues in auction sales. While it upholds the power of Electric Utilities to recover dues from new owners, it also emphasizes the need for fairness and due process. The court’s decision balances the interests of all parties involved, ensuring that the electricity sector can operate efficiently while protecting the rights of consumers.

Category

• Electricity Law
  • Electricity Act 2003
  • Section 43, Electricity Act 2003
  • Section 50, Electricity Act 2003
  • Section 56, Electricity Act 2003
  • Electricity Act 1910
  • Electricity (Supply) Act 1948
  • Electricity Regulatory Commissions Act 1998
  • Electricity Supply Code
  • Universal Service Obligation
  • Regulatory Regime
  • Subordinate Legislation
• Property Law
  • Transfer of Property Act 1882
  • Section 100, Transfer of Property Act 1882
  • Charge on Property
  • Encumbrance
  • “As is where is” basis
• Auction Law
  • Public Auction
  • Auction Purchasers
  • Caveat Emptor
• Debt Recovery
  • SARFAESI Act
  • Debt Recovery Tribunal
  • Recovery of Dues
• Corporate Law
  • Sick Industrial Companies (Special Provisions) Act 1985
  • Winding Up
  • Liquidation
  • Board for Industrial and Financial Reconstruction (BIFR)

FAQ

Q: If I buy a property in an auction, am I responsible for the previous owner’s electricity bills?
A: Yes, generally, if the statutory rules or conditions of supply allow for recovery of dues from subsequent owners, you may be liable. The “as is where is” condition in auction sales often implies that you acknowledge all existing liabilities.

Q: What does “as is where is” mean in the context of an auction sale?
A: “As is where is” means that you are buying the property with all its existing rights, obligations, and liabilities, including any outstanding electricity dues.

Q: Does the Supreme Court judgment mean that I have to pay all the old electricity bills?
A: The judgment indicates that you may be liable for the dues, but the Supreme Court directed Electric Utilities to waive the interest accrued on the principal dues from the date of your application for supply of electricity, to balance the equities.

Q: Can the electricity company disconnect my power if I don’t pay the old bills?
A: The electricity company can disconnect your power if you don’t pay the dues, but Section 56(2) of the Electricity Act 2003 limits the power to disconnect after two years. However, the company can still pursue other avenues of recovery.

Q: Are electricity dues considered a charge on the property?
A: No, electricity dues are generally not considered a charge on the property unless explicitly stated by law. They are typically treated as unsecured debts.

Q: Is a new electricity connection for an auction purchaser considered a fresh connection or a reconnection?
A: It is considered a fresh connection, irrespective of whether the property had an existing connection before.

Q: What is the Universal Service Obligation (USO) in the context of electricity supply?
A: The USO under Section 43 of the Electricity Act 2003 requires licensees to supply electricity on application. However, the Supreme Court clarified that this obligation is not absolute and is subject to statutory conditions, including the payment of dues.

Q: What should I do before buying a property in an auction?
A: Conduct thorough due diligence, including verifying any outstanding electricity dues. Obtain a no-dues certificate from the electricity company if possible.