Supreme Court settles liability for post-liquidation taxes in company winding up: Official Liquidator vs. Ujjain Nagar Palika Nigam (2023) INSC 489 (04 May 2023)

Date of the Judgment: 04 May 2023
Citation: (2023) INSC 489
Judges: Dinesh Maheshwari, J., Aniruddha Bose, J.
Can an Official Liquidator (OL) be held liable for property and water taxes that accrue on a company’s assets after the company has been ordered to be wound up, but before the assets are sold? This was the core question before the Supreme Court in the case of Official Liquidator vs. Ujjain Nagar Palika Nigam. The Court had to determine who bears the responsibility for these post-liquidation dues – the OL, the auction purchaser, or the company itself? The Supreme Court of India, in this judgment authored by Justice Dinesh Maheshwari, clarified the responsibilities of an Official Liquidator regarding post-liquidation taxes and the implications for auction purchasers.

Case Background

The case revolves around 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 its winding up, and the Company Court ordered the company to be wound up on 10 July 1997, appointing the appellant as the Official Liquidator (OL). The OL was tasked with taking 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 notice detailed the assets and terms of sale, emphasizing that the OL provided no guarantees regarding the quality or quantity of the assets.

The assets were sold to Nagendra Jain for Rs. 20.50 crore, and the sale was confirmed on 04 July 2003. Subsequently, Respondent No. 3 was nominated as the purchaser in place of Nagendra Jain. After the sale, the OL invited claims from 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 water tax arrears of Rs. 11,14,612 for the period from 01 June 1996 to 31 October 2005. The OL admitted the claims only for the pre-liquidation period (before 10 July 1997), rejecting the post-liquidation claims.

Timeline

Course of Proceedings

The Nigam challenged the OL’s rejection of post-liquidation claims by filing company applications before the Company Court. The Company Court framed the issue as to whether claims arising after the winding-up order could be outright rejected. The Company Court ruled against the OL, stating that the OL’s liability was not restricted to claims only until the winding-up date and that post-liquidation liabilities were part of the cost of winding up and had priority. The Company Court allowed the Nigam’s claims but gave the OL the liberty to file an appeal against the demands within thirty days.

The OL appealed to the Division Bench of the High Court, arguing that he had not carried on any business and was not liable for post-liquidation taxes. The Division Bench upheld the Company Court’s decision, stating that the sale notice did not clearly indicate that the purchaser was liable for any encumbrances, and that the OL was liable for post-liquidation taxes. The Division Bench distinguished the case from United Bank of India v. Official Liquidator, noting that the sale notice in that case had more comprehensive language regarding encumbrances.

Legal Framework

The Supreme Court considered several 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.
  
  “Notwithstanding anything contained in any other provisions of this Act or any other law for the time being in force, in the winding up of a company- (a) workmen’s dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of section 529 pari passu with such dues, 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 12 months before the relevant date.
  
  “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 shall be estimated at the date of the winding-up order.
  
  “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 deals with the communication of acceptance or rejection of proof of debt by the liquidator.
  
  “After such investigation as he may think necessary, the liquidator shall in writing 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 where 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 outlines the order of priority for payments out of the assets of a company in winding up, with costs and expenses of preserving assets being given priority.
  
  “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, where 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 if any, be liable to the following payments which shall be made in the following order of priority, namely :-“
• Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956: This section states that sums due for taxes on land or buildings are a first charge on the property, but arrears 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.
  
  “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.”

Arguments

Official Liquidator (Appellant):

• The OL argued that his liability was limited to taxes accrued until the date of the winding-up order (10 July 1997) and payable within one year thereof, as per Section 530 of the Companies Act, 1956.
• He contended that post-liquidation taxes should not be prioritized over pre-liquidation creditors like workers and secured creditors, as per Section 529A of the Companies Act, 1956.
• The OL stated that the assets were under the custody of the Court, and he did not conduct any business or use water, thus not incurring any post-liquidation tax liability.
• He argued that the sale of assets was on an “as is where is whatever there is” basis, implying that the purchaser was responsible for all encumbrances and statutory dues.
• The OL relied on the principle of caveat emptor (let the buyer beware), asserting that the purchaser should have been aware of all dues before purchasing the assets.
• The OL argued that the High Court erred in treating post-liquidation liabilities as part of the cost of winding up, which gives them priority over all other liabilities.

Ujjain Nagar Palika Nigam (Respondent No. 1):

• The Nigam argued that the OL was liable for both pre- and post-liquidation taxes, as the OL was responsible for maintaining the property until its sale.
• It contended that post-liquidation taxes were part of the “liquidation expenses” and should be paid out of the sale proceeds, with reference to Rule 338 of the Companies (Court) Rules, 1959.
• The Nigam asserted that Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956, creates a first charge on the property for municipal taxes, and the proviso protects the auction purchaser from liability for arrears prior to their occupation.
• It argued that the OL, as a custodian of the property, was obligated to pay the taxes to preserve the property.
• The Nigam contended that preferential payments under Section 530 of the Companies Act, 1956, apply to pre-liquidation claims, while post-liquidation expenses are to be paid in priority.

Auction Purchaser (Respondent No. 3):

• The auction purchaser argued that he was liable for property and water taxes only from the date of confirmation of the sale (04 July 2003).
• He stated that the Companies Act and the Rules of 1959 do not impose any obligation on the purchaser to pay dues relating to the period between the winding-up order and the sale confirmation.
• The purchaser contended that post-liquidation charges were costs of winding up and should be borne out of liquidation proceeds.
• He argued that the “as is where is” stipulation in the sale notice pertained to the physical properties of the asset and did not imply constructive notice of any charge or encumbrance.
• The auction purchaser relied on Section 100 of the Transfer of Property Act, 1882, and decisions of the Supreme Court to assert that he could not be held liable for arrears of tax without notice.
• He argued that Section 185 of the M.P. Act of 1956, protects him from liability for arrears of tax prior to the confirmation of the auction sale.

Steel Authority of India Limited (Respondent No. 2)

• The respondent supported the submissions of the Official Liquidator.
• It contended that the findings of the High Court were not in accordance with the law pertaining to ouster clauses in the sale notice which clearly stated that the sale of assets of the company in liquidation was on “as is where is whatever there is” basis.
• It argued that the auction purchaser takes the property subject to all defects of title and the doctrine of caveat emptor directly applies to such purchaser.

Submissions Table

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the claims made by the 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:

Cases:

• United Bank of India v. Official Liquidator and Ors. 79 Company Cases 262 [= (1994) 1 SCC 575] – The Court distinguished this case, noting that the sale notice in that case had more comprehensive language regarding encumbrances.
• Haryana Financial Corporation v. Rajesh Gupta (2010) 1 SCC 655 – The Court observed that the principles applicable to an Official Liquidator selling property under the orders of Court would not be applicable to an individual selling immovable property belonging to himself.
• UT Chandigarh Administration and Anr. v. Amerjeet Singh and Ors. (2009) 4 SCC 660 – The Court held that in a public auction of existing sites, the purchaser cannot claim deficiency of service or denial of service.
• Punjab Urban Planning and Development Authority v. Raghu Nath Gupta (2012) 8 SCC 197 – The Court held that purchasers would be liable to pay interest having accepted the commercial plots subject to the conditions of the auction notice.
• Ahmedabad Municipal Corporation v. Haji Abdul Gafur Haji Hussenbhai (1971) 1 SCC 757 – The Court held that no charge is enforceable against a transferee for consideration without notice of the charge, unless expressly provided by law.
• AI Champdany Ltd. v. Official Liquidator and Anr. (2009) 4 SCC 486 – The Court held that municipal tax dues do not create an encumbrance on the property and are considered a personal liability.
• Municipal Board, Cawnpore v. Roop Chand Jain and Anr. AIR 1940 All 456 – Approved by Ahmedabad Municipal Corporation (supra), this case deals with the principle of caveat emptor in auction sales.
• Delhi Development Authority v. Kenneth Builders and Developers Pvt. Ltd. and Ors. (2016) 13 SCC 561 – The Court held that the proviso to Section 185 of the M.P. Act of 1956 frees an auction purchaser from making inquiries about tax arrears.
• In re Toshoku Finance UK plc [2002] 1 WLR 671 – The Court considered this English decision regarding the priority of post-liquidation expenses.

Statutes and Rules:

• Section 529A of the Companies Act, 1956 – Overriding preferential payment.
• Section 530 of the Companies Act, 1956 – Preferential payments.
• Rule 154 of the Companies (Court) Rules, 1959 – Value of debts.
• Rule 163 of the Companies (Court) Rules, 1959 – Acceptance or rejection of proof.
• Rule 338 of the Companies (Court) Rules, 1959 – Costs and expenses payable out of the assets in a winding-up.
• Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956 – Liability of buildings, lands, etc., for taxes.
• Section 100 of the Transfer of Property Act, 1882 – Charges.

Authority Analysis Table

Judgment

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

How each authority was viewed by the Court?

• The Court distinguished United Bank of India v. Official Liquidator and Ors., stating that the sale notice in that case had more comprehensive language regarding encumbrances.
• The Court distinguished Haryana Financial Corporation v. Rajesh Gupta, stating that the principles applicable to an Official Liquidator selling property under the orders of Court would not be applicable to an individual selling immovable property belonging to himself.
• The Court held that UT Chandigarh Administration and Anr. v. Amerjeet Singh and Ors. was not relevant to the present case.
• The Court held that Punjab Urban Planning and Development Authority v. Raghu Nath Gupta was not relevant to the present case.
• The Court relied on Ahmedabad Municipal Corporation v. Haji Abdul Gafur Haji Hussenbhai to emphasize that no charge is enforceable against a transferee for consideration without notice of the charge, unless expressly provided by law.
• The Court relied on AI Champdany Ltd. v. Official Liquidator and Anr. to show that municipal tax dues do not create an encumbrance on the property and are considered a personal liability.
• The Court considered Municipal Board, Cawnpore v. Roop Chand Jain and Anr., which was approved in Ahmedabad Municipal Corporation (supra), this case deals with the principle of caveat emptor in auction sales.
• The Court considered Delhi Development Authority v. Kenneth Builders and Developers Pvt. Ltd. and Ors., which held that the proviso to Section 185 of the M.P. Act of 1956 frees an auction purchaser from making inquiries about tax arrears.
• The Court considered In re Toshoku Finance UK plc for the principle that post-liquidation expenses have priority.

What weighed in the mind of the Court?

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

• Terms of Sale: The Court emphasized that the sale notice did not explicitly state that the purchaser was liable for encumbrances, especially post-liquidation taxes. The “as is where is” clause was interpreted to pertain to the physical condition of the assets, not to encumbrances or statutory dues.
• Statutory Obligations: The Court noted that Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956, protects an occupier (who is not the owner) from liability for tax arrears from a period when they were not in occupation. This provision weighed heavily against holding the auction purchaser liable.
• Cost of Winding Up: The Court considered post-liquidation taxes as part of the costs of winding up, which have priority over other debts. This was supported by Rule 338 of the Companies (Court) Rules, 1959.
• Protection of Auction Purchaser: The Court was keen to protect the auction purchaser from unforeseen liabilities, especially when the sale notice did not provide clear notice of such encumbrances.
• Official Liquidator’s Duty: The Court held that the OL, as a custodian of the property, was responsible for preserving the assets and paying the necessary expenses, including post-liquidation taxes.

The Court’s decision was driven by a need to balance the interests of all parties involved, while ensuring that the sale process was fair and transparent. The Court emphasized the need for clear and comprehensive sale notices to avoid ambiguity and protect the interests of purchasers.

Sentiment Analysis Table

Decision

The Supreme Court upheld the High Court’s decision and dismissed the appeal filed by the Official Liquidator. The Court held that the Official Liquidator was liable for the post-liquidation taxes. The Court also clarified that the auction purchaser was not liable for any taxes that accrued prior to the sale confirmation.

The Court reasoned that the sale notice did not explicitly state that the purchaser was liable for encumbrances, especially post-liquidation taxes. The “as is where is” clause was interpreted to pertain to the physical condition of the assets, not to encumbrances or statutory dues. The Court also held that post-liquidation taxes are part of the costs of winding up, which have priority over other debts, and that the OL, as a custodian of the property, was responsible for preserving the assets and paying the necessary expenses, including post-liquidation taxes.

Implications

The Supreme Court’s ruling has several significant implications:

• For Official Liquidators:
  • Official Liquidators are now clearly liable for post-liquidation taxes and other charges until the assets are sold.
  • They must ensure that sale notices clearly specify all encumbrances and liabilities to avoid future disputes.
  • They must factor in post-liquidation taxes as part of the costs of winding up and prioritize these payments.
  • They must maintain proper records of all dues and expenses to ensure transparency and accountability.
  • They have a responsibility to preserve the assets and pay the necessary expenses, including post-liquidation taxes.
• For Auction Purchasers:
  • Auction purchasers are protected from liabilities that accrue before the sale is confirmed, unless explicitly stated in the sale notice.
  • They must still be diligent in examining the sale notice and inquiring about any potential encumbrances.
  • They should ensure that the sale notice clearly states that they are not liable for pre-sale dues, especially post-liquidation dues.
  • They can rely on the proviso to Section 185 of the Madhya Pradesh Municipal Corporation Act, 1956, which protects them from liability for arrears prior to their occupation.
• For Municipal Authorities:
  • Municipal authorities can claim post-liquidation taxes from the Official Liquidator as part of the winding-up costs.
  • They should ensure that their claims are filed promptly and accurately.
  • They should be aware of the priority of their claims under the Companies Act and the Rules of 1959.
  • They should ensure that they are not claiming against the auction purchaser for dues prior to the confirmation of sale.

Flowchart of the Decision-Making Process

Conclusion

The Supreme Court’s decision in Official Liquidator vs. Ujjain Nagar Palika Nigam provides much-needed clarity on the liability for post-liquidation taxes in company winding-up cases. The ruling establishes that Official Liquidators are responsible for these dues until the assets are sold, while protecting auction purchasers from unforeseen encumbrances. This judgment underscores the importance of clear and comprehensive sale notices and the need for liquidators to factor in post-liquidation taxes as part of the costs of winding up. The decision aims to achieve a fair balance between the interests of all parties involved in the winding-up process.