Supreme Court settles liability for previous electricity dues in auction sales: Telangana State Southern Power Distribution Company Limited vs. Srigdhaa Beverages (2020) INSC 368

Date of the Judgment: June 01, 2020
Citation: (2020) INSC 368
Judges: Sanjay Kishan Kaul, J. and K.M. Joseph, J.
Can an auction purchaser be held liable for the previous electricity dues of the former owner, especially when the property was sold on an “as is where is” basis? The Supreme Court of India addressed this critical question in a case involving the Telangana State Southern Power Distribution Company Limited and M/s. Srigdhaa Beverages. The court clarified the obligations of auction purchasers regarding outstanding electricity bills, particularly when the auction notice explicitly mentions such dues. This judgment was delivered by a two-judge bench comprising Justice Sanjay Kishan Kaul and Justice K.M. Joseph.

Case Background

The case revolves around M/s. Srigdhaa Beverages, the respondent, who purchased a mineral water bottling plant through an auction conducted by Syndicate Bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The previous owner, M/s. SB Beverages Private Limited, had failed to repay its loan, leading to the auction of the property, which included land and a bottling plant. The auction notice, dated 25.05.2017, explicitly stated that the property was being sold on an “AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE BASIS”. The total outstanding dues of the previous owner were ₹13,97,26,258.77, while the reserve price for the property was set at ₹9,18,65,000. The respondent successfully bid for the property at a price slightly above the reserve price.

The auction notice also mentioned outstanding dues of local government including electricity bills amounting to ₹83,17,152. The terms and conditions of the auction specified that the successful bidder would bear all statutory dues, taxes, and outgoing expenses, both existing and future. Further, the Authorised Officer explicitly stated that they would not be responsible for any charges, liens, encumbrances, property tax dues, electricity dues, or any other dues to the Government or local authority.

Timeline

Course of Proceedings

The respondent, M/s. Srigdhaa Beverages, filed a writ petition before the High Court of Telangana and Andhra Pradesh, challenging the demand for payment of the previous owner’s electricity dues. The High Court, relying on previous judgments of the Supreme Court, quashed the demand, holding that the subsequent purchaser was not liable for the dues of the previous owner. An appeal was filed before the Division Bench against this order, which was also dismissed on 30.04.2018. Consequently, the Telangana State Southern Power Distribution Company Limited (appellant No.1) appealed to the Supreme Court.

Legal Framework

The core legal issue involves the interpretation of the General Terms and Conditions of Supply of Distribution & Retail Supply Licensees in AP, specifically Clauses 5.9.6 and 8.4. These clauses state:

• “5.9.6 Dismantlement of Service Line after Termination of Agreement: On the termination of the LT or HT Agreement, the company is entitled to dismantle the service line and remove the materials, Meter, cut out etc. After termination of the Agreement, the consumer shall be treated as a fresh applicant for the purpose of giving supply to the same premises when applied for by him provided there are no dues against the previous service connection.”
• “8.4 Transfer of Service Connection: The seller of the property should clear all the dues to the Company before selling such property. If the seller did not clear the dues as mentioned above, the Company may refuse to supply electricity to the premises through the already existing connection or refuse to give a new connection to the premises till all dues to the Company are cleared.”

These clauses, according to the appellant, allow them to recover previous dues from a new applicant or purchaser. The dues are also considered statutory dues under the Electricity Act, 2003.

Arguments

Arguments of the Respondent (M/s. Srigdhaa Beverages):

• The respondent argued that as a subsequent purchaser, they were not liable for the electricity dues of the previous owner.
• They relied on the judgments of the Supreme Court in Isha Marbles v. Bihar State Electricity Board & Anr. and Southern Power Distribution Company of Telangana Limited (through its CMD) & Ors. v. Gopal Agarwal & Ors., which, according to them, supported the proposition that a new purchaser is not responsible for the dues of the previous consumer.
• They contended that the liability to pay electricity dues is fastened only on the consumer at the relevant time, and since they were not the consumer during the period when the dues accrued, they could not be held liable.
• They argued that they were merely seeking a reconnection without any statutory dues towards consumption charges on their part.

Arguments of the Appellants (Telangana State Southern Power Distribution Company Limited):

• The appellants contended that the electricity dues are statutory in nature under the Electricity Act, 2003, and the General Terms & Conditions of Supply.
• They emphasized that the auction notice clearly stated that the property was being sold on an “AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE BASIS” and that the purchaser would be liable for all statutory dues, including electricity dues.
• They highlighted Clause 26 of the auction notice, which absolved the Authorised Officer from any liability for electricity dues.
• They relied on the judgment in Dakshin Haryana Bijli Vitran Nigam Ltd. v. Paramount Polymers (P) Ltd., which held that a transferee desiring to enjoy a service connection must pay outstanding dues.
• They argued that the respondent, as an auction purchaser, should have inspected the premises and inquired about the dues and was clearly put to notice regarding the electricity dues.
• They argued that the clauses in the General Terms & Conditions of Supply clearly stipulate that the company can refuse to supply electricity until all dues are cleared, irrespective of whether it is a new connection or a reconnection.

Innovativeness of the Argument: The appellant’s argument was innovative in highlighting the specific clauses of the auction notice, which clearly stated that the sale was on an “as is where is” basis and that the purchaser was liable for all statutory dues, including electricity dues. This was a departure from the previous cases relied upon by the respondent, which lacked such explicit clauses.

Issues Framed by the Supreme Court

The main issue framed by the Supreme Court was:

1. Whether the liability towards previous electricity dues of the last owner could be imposed on the respondent (auction-purchaser)?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

• Section 56 of the Electricity Act, 2003: (in pari materia with Section 24 of the Electricity Act, 1910) – The Court noted that this section emphasizes that electricity dues are statutory in nature and cannot be waived.
• Clauses 5.9.6 and 8.4 of the General Terms and Conditions of Supply: These clauses were crucial in determining that the electricity company could refuse a new connection or reconnection until the previous dues were cleared.
• Rules 8 & 9 of the Security Interest (Enforcement) Rules, 2002: The Court noted that the auction was conducted as per these rules.

Judgment

The Supreme Court held that the respondent was liable for the previous electricity dues of the former owner. The court emphasized that the auction notice clearly stated that the property was being sold on an “AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE BASIS,” and that the purchaser would be responsible for all statutory dues, including electricity dues. The court also noted that the electricity dues are statutory in nature and cannot be waived. The court distinguished the previous judgments relied upon by the respondent, noting that those cases did not involve specific clauses in the auction notices that explicitly mentioned the purchaser’s liability for electricity dues.

How each authority was viewed by the Court:

• Isha Marbles v. Bihar State Electricity Board & Anr. [1995] 2 SCC 648: The Court distinguished this case, stating that it did not have a clause like Clause 26 in the present case.
• Southern Power Distribution Company of Telangana Limited (through its CMD) & Ors. v. Gopal Agarwal & Ors. [2018] 12 SCC 644: The Court distinguished this case for the same reason as Isha Marbles.
• Hyderabad Vanaspathi Ltd. v. A.P. State Electricity Board & Ors. [1998] 4 SCC 470: The Court relied on this case to emphasize that electricity dues are statutory, not purely contractual.
• Dakshin Haryana Bijli Vitran Nigam Ltd. v. Paramount Polymers (P) Ltd. [2006] 13 SCC 101: The Court drew strength from this case, which held that a transferee must pay outstanding dues to enjoy a service connection.
• Paschimanchal Vidyut Vitran Nigam Limited & Ors. v. DVS Steels and Alloys Private Limited & Ors. [2009] 1 SCC 210: The Court cited this case to support the view that a condition for clearance of dues is reasonable.
• Haryana State Electricity Board v. Hanuman Rice Mills, Dhanauri & Ors. [2010] 9 SCC 145: The Court distinguished this case because the pendency of electricity dues was not mentioned in the terms of sale.
• Special Officer, Commerce, North Eastern Electricity Supply Company of Orissa (NESCO) v. Raghunath Paper Mills Private Limited & Anr. [2012] 13 SCC 479: The Court distinguished this case, stating that the present case covers both connection and reconnection under clause 8.4 of the General Terms & Conditions of Supply.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the explicit terms of the auction notice, which stated that the sale was on an “as is where is” basis and that the purchaser was liable for all statutory dues, including electricity dues. The court also emphasized the statutory nature of electricity dues under the Electricity Act, 2003, and the General Terms and Conditions of Supply. The court distinguished the previous judgments relied upon by the respondent, noting that those cases did not involve specific clauses in the auction notices that explicitly mentioned the purchaser’s liability for electricity dues.

Logical Reasoning:

The Court considered alternative interpretations, such as the respondent’s argument that they were not liable for the previous owner’s dues as they were a subsequent purchaser. However, the court rejected this interpretation, emphasizing the specific clauses in the auction notice and the statutory nature of the dues. The final decision was reached by considering the explicit terms of the auction notice, the statutory nature of electricity dues, and the lack of similar clauses in the previous cases relied upon by the respondent.

The court’s reasoning can be summarized as follows:

• The auction notice clearly stated that the property was being sold on an “as is where is” basis, and the purchaser would be liable for all statutory dues, including electricity dues.
• Electricity dues are statutory in nature under the Electricity Act, 2003, and the General Terms and Conditions of Supply.
• The previous judgments relied upon by the respondent did not involve similar clauses in the auction notices that explicitly mentioned the purchaser’s liability for electricity dues.
• The clauses in the General Terms & Conditions of Supply clearly stipulate that the company can refuse to supply electricity until all dues are cleared, irrespective of whether it is a new connection or a reconnection.

“The property described below is being sold on “AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE BASIS” under the rule no.8 & 9 of the Security Interest (Enforcement) Rules”

“The Authorised Officer will not be responsible for any charge, lien, encumbrance, property tax dues, electricity dues, etc., or any other dues to the Government, local authority or anybody, in respect of the property under sale.”

“the liability to pay electricity dues exists on the respondent (purchaser).”

There was no minority opinion in this case; both judges concurred with the final decision.

The judgment implies that auction purchasers must carefully examine the terms of the auction notice and make inquiries about any outstanding dues, including electricity dues, before submitting their bids. It also clarifies that electricity dues are statutory in nature and cannot be waived, especially when the auction notice explicitly mentions the purchaser’s liability for such dues. This decision could potentially impact future auction sales, requiring greater due diligence on the part of prospective purchasers.

The Court did not introduce any new doctrines or legal principles but clarified the existing legal position regarding the liability for electricity dues in auction sales.

Key Takeaways

• Auction purchasers must conduct thorough due diligence and review all terms and conditions of the auction notice, especially regarding statutory dues like electricity dues.
• Electricity distribution companies can recover outstanding dues from auction purchasers if the auction notice clearly states that the sale is on an “as is where is” basis and the purchaser is liable for all statutory dues.
• Electricity dues are statutory in nature and cannot be waived, particularly when the auction notice explicitly mentions the purchaser’s liability for such dues.
• The clauses in the General Terms & Conditions of Supply clearly stipulate that the company can refuse to supply electricity until all dues are cleared, irrespective of whether it is a new connection or a reconnection.

This judgment could lead to more cautious bidding by prospective purchasers in auctions, as they will need to factor in the potential liability for outstanding electricity dues. It also provides clarity to electricity distribution companies on their rights to recover such dues.

Directions

The Supreme Court set aside the impugned orders of the High Court and stated that appellant No.1 (Telangana State Southern Power Distribution Company Limited) was well within its right to demand the arrears due from the last owner from the respondent-purchaser.

Development of Law

The ratio decidendi of the case is that when an auction notice explicitly states that the sale is on an “as is where is” basis and that the purchaser is liable for all statutory dues, including electricity dues, the purchaser is indeed liable for those dues. This judgment clarifies the legal position and emphasizes the importance of specific clauses in auction notices. It also reinforces the statutory nature of electricity dues and the power of distribution companies to recover such dues from auction purchasers. The previous positions of law, as seen in cases like Isha Marbles and Gopal Agarwal, were distinguished based on the absence of explicit clauses regarding liability for electricity dues in the auction notices.

Conclusion

In conclusion, the Supreme Court’s judgment in Telangana State Southern Power Distribution Company Limited v. M/s. Srigdhaa Beverages clarifies that an auction purchaser is liable for the previous owner’s electricity dues when the auction notice explicitly states that the sale is on an “as is where is” basis and that the purchaser is liable for all statutory dues. This decision reinforces the statutory nature of electricity dues and the importance of due diligence by auction purchasers. The court set aside the High Court’s orders and upheld the right of the electricity distribution company to recover the dues from the auction purchaser.