Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1118 OF 2009
(Arising out of SLP (C) No.15285 of 2008)
AI Champdany Industries Limited … Appellant
Versus
The Official Liquidator & Anr. … Respondents
J U D G M E N T
S.B. Sinha, J.
1. Leave granted.
2. Wool-Combers of India Limited (the company) went in liquidation.
Appellant purchased assets of the company in liquidation in a court sale for
a consolidated sum of Rs.7,03,00,000/-. Sale was confirmed by the learned
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Company Judge by an Order dated 15 September, 2006.
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3. Appellant was served with a notice dated 15-02-2007 by Bhatpara
Municipality claiming payment of arrears of property tax amounting to
Rs.47,59,597.19/- for the period from 1991-1992 and 2006-2007, stating :
“that before adopting the said stringent measure
for realizing the arrear property tax once again
give you and opportunity to pay all arrear property
tax in respect of the said holdings being 1/, West
Ghoshpara Road, Ward No. 12, amounting to
Rs.47,59,597.19/- plus statutory interest within
seven days from the receipt thereof.”
4. Appellant contends that it has no liability to pay the said dues and the
same has to be adjusted from the sale proceeds. It is furthermore stated that
on and from the date of purchase it had paid all municipal rates and taxes
subsequent to the date of sale.
Appellant on receipt of the said notice took out a Chamber Summons
praying, inter alia, for the following reliefs :
“(a) Necessary clarification be made that Sale
confirmed in favour of applicant by order dated
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15 September, 2006 would make the applicant
liable for payment of property tax only on and
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from the date of confirmation of sale i.e. 15
September, 2006 and not for any period prior
thereto;
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(b) Order dated 15 September, 2006 be suitably
modified and/or clarified in terms of prayers
above;
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(c) Injunction restraining the respondent no. 2 from
claiming any alleged arrear property tax for period
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prior to 15 September, 2006;
(d) Direction be given to the respondent no. 2 lodge
its claim before the Official Liquidator for any
alleged claim on account of property tax for period
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prior to 15 September, 2006.
(e) Injunction restraining the respondent no. 2 from
giving any effect and/or further effect to the notice
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dated 15 February, 2007 and 6 March, 2007
being Annexures “E” and “G” respectively to the
affidavit in support of this summons;
(f) Ad-interim orders in terms of prayers above;
(g) Costs of and/or incidental to this application be
paid by the respondent no. 2;
(h) Such further and/or other order or orders as this
Hon’ble Court may deem fit and proper.”
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5. By reason of an order dated 7 February, 2008, the said application
has been dismissed, stating :
“Having considered the submissions of the parties
the terms “as is where is basis and whatever there
is basis” signifies, the condition, quality and the
quantity in which the assets sold, exists. It does
not take into account the liabilities attached to the
assets sold. The terms and conditions of sale,
however, called upon the bidders to satisfy
themselves regarding title and encumbrance
attached to the said asset. Encumbrance would
include the liability attached to the asset including
the tax payable. Therefore, it was incumbent upon
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the purchaser to make enquiry regarding liabilities
(to be read as encumbrance) attached to the asset
before making the offer, The tax payable to the
municipality is one such encumbrance and for not
making enquiry the petitioner cannot avoid
payment.”
6. An intra court appeal preferred thereagainst has been dismissed by a
Division Bench of the said court.
7. Mr. Sunil Kumar, learned senior counsel, in support of this appeal,
would contend that a purchaser is not liable to pay the property tax prior to
the date of purchase and remedy of the respondent municipality, if any, was
to have its claim satisfied from the sale proceeds in terms of Sections 529
and 529A of the Companies Act, 1956.
8. Mr. Sibaji Sen, learned senior counsel appearing on behalf of the
respondent-Municipal Corporation, on the other hand, would draw our
attention to the advertisement for sale to contend that the appellant had a
duty to make an enquiry in regard to the Company’s encumbrance as also in
terms of the provisions of Sections 55(1) and 55(2)(g) of the Transfer of
Property Act.
The learned counsel appearing on behalf of the official liquidator
would support the said contention.
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9. The company went in liquidation. It was directed to be wound up.
The official liquidator indisputably took charge of both movable and
immovable assets of the company. The fact that the company went in
liquidation was given due publicity. Respondent-Municipality did not file
its claim before the official liquidator. It did not stand in queue to get the
same recovered and/or adjusted from the sale proceeds.
Indisputably the manner in which the claim of a creditor in respect of
the dues of the company in liquidation is to be realized has been laid down
in Sections 529 and 529A of the Companies Act, 1956.
10. Dues in relation to the Municipal Tax in terms of the provisions of the
said Act do not create any encumbrance on the property. It does not create
any charge. It is considered to be a personal liability. On the
aforementioned premise, we have to construe the terms and conditions of
sale. It reads as under :
“1. The sale will be held as per inventory made by the
Valuer on “As is Where is And Whatever There is” basis
and subject to confirmation by the Hon’ble High Court at
Calcutta. The Official Liquidator shall not provide any
guarantee and/or warranty as to the quality, quantity or
specification of the assets sold. The Offerers/Bidders are
to satisfy themselves in this regard after physical
inspection of the assets/properties as to the title,
encumbrance, area, boundary, measurement, description
etc. of the Company (in Liquidation) and the purchasers
will be deemed to offer with full knowledge as to the
defects, if any in the descriptions, quality or quantity of
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the assets sold. The Official Liquidator shall not
entertain any complaint in this regard after the sale is
over. Any mistake in the notice inviting tender shall not
vitiate the sale.”
11. Both the learned Single Judge as also the Division Bench of the High
Court held that having regard to the fact that an inventory was made on “as
is where is and whatever there is” basis and furthermore in view of the fact
that a duty was cast upon the offerer to satisfy themselves in regard to the
physical inspection of the assets/properties as to the title, encumbrance,
area, boundary, measurement, description etc. of the assets of the company
in liquidation and the purchaser would be deemed to be offering his prices
therefor with full knowledge as to the defects containing the descriptions,
quality or quantity of the assets sold, the appellant was bound to make an
investigation in regard to the liabilities of the company in liquidation.
12. The terms and conditions of the sale must be read as a whole. It must
be given a purposive meaning.
The word ‘encumbrance’ in relation to the word ‘immovable
property’ carries a distinct meaning. It ordinarily cannot be assigned a
general and/or dictionary meaning. We may however notice some
dictionary meanings of the said word as reliance thereupon has been placed
by Mr. Sibaji Sen.
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In Stroud’s Judicial Dictionary of Words and Phrases 5 Edition
Encumbrance is defined as “being, ‘a claim, lien, or liability, attached to
property’; and this definition is wide enough to cover the plaintiff’s claim,”
which was, as assignee for value of a reversionary interest, against a
person coming in under a subsequent title.”
In Supreme Court on Words and Phrases it is stated that “ the word
‘encumbrance’ means a burden or charge upon property or a claim or lien
upon an estate or on the land.”
In Advanced Law Lexicon Encumbrance is defined as “ an
infringement of another’s right or intrusion on another’s property.”
In Black’s Law Dictionary Encumbrance is defined as “any right to,
or interest in, land which may subsist in another to diminution of its value,
but consistent with the passing of the fee.”
13. Encumbrance, therefore, must be capable of being found out either on
inspection of the land or the office of Registrar or a statutory authority. A
charge, burden or any other thing which impairs the use of the land or
depreciates in its value may be a mortgage or a deed of trust or a lien or an
easement. Encumbrance thus must be a charge on the property. It must run
with the property. If by a reason of the statute no such burden on the title
which diminishes the value of the land is created, it shall not constitute any
encumbrance.
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14. If the property tax was merely a statutory dues without creating any
encumbrance on the property which had cast a duty upon all the auction
purchasers to make an investigation, it would mean that he must try to find
out all the liabilities of the company in liquidation in their entirety.
Respondent-Municipality was an unsecured creditor. In that capacity it
cannot stand on a higher footing than an ordinary unsecured creditor who is
required to stand in queue with all others similarly situated for the purpose
of realization of their dues from the sale proceeds.
15. Companies Act or any other law does not impose any additional
obligation upon the purchaser to make an enquiry with regard to the
liabilities of the companies other than those which would impede its value.
Reliance has been placed by Mr. Sen on a decision reported in
Ahmedabad Municipality Vs. Haji Abdul [AIR 1971 SC 1201] wherein it
was held :
“The plaintiff purchased the property in November, 1954
and in our opinion it could not have reasonably been
expected by him that the receivers would not have paid
to the municipal corporation, since 1949 the taxes and
other dues which were charged on this property by
statute. According to Section 61 of the Provincial
Insolvency Act, 1920 the debts due to a local authority
are given priority, being bracketed along with the debts
due to the State.”
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We may notice that Section 141 of the Bombay Provincial Municipal
Corporation Act provides that the property taxes to be a first charge on the
premise for which they are assessed. It is in that view of the matter Section
100 of the Transfer of Property Act was found to be capable of being
invoked therein, which reads as under :
“100.Charges - Where immoveable property of one
person is by act of parties 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 mortgage 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 the 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.”
16. There cannot, thus, be any doubt or dispute that a provision of law
must expressly provide for an enforcement of a charge against the property
in the hands of the transferee for value without notice to the charge and not
merely create a charge.
17. In Ahemdabad Municipality itself it was held :
“According to the submission it is not necessary for the
saving provision to expressly provide for the
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enforceability of the charge against the property in the
hands of a transferee for consideration without notice
of the charge. This submission is unacceptable
because, as already observed, what is enacted in the
second half of Section 100 of Transfer of Property Act
is the general prohibition that no charge shall be
enforced against any property in the hands of a
transferee for consideration without notice of the
charge and the exception to this general rule must be
expressly provided by law. The real core of the saving
provision of law must be not mere enforceability of the
charge against the property charged but enforceability
of the charge against the said property in the hands of a
transferee for consideration without notice of the
charge. Section 141 of the Bombay Municipal Act is
clearly not such a provision. The second contention
accordingly fails and is repelled.”
It was further more held :
“Reliance was next placed on a Full Bench decision of
the Allahabad High Court in Nawal Kishore V. The
Municipal Board, Agra, ILR (1943). All 453 = (AIR
1943 All 115 (FB)). According to this decision the
question of constructive notice is a question of fact
which falls to be determined on the evidence and
circumstances of each case. But that Court felt that
there was a principle on which question of constructive
notice could rest, that principle being that all intending
purchasers of the property in municipal areas where the
property is subject to a municipal tax which has been
made a charge on the property by statute have a
constructive knowledge of the tax and of the possibility
of some arrears being due with the result that it
becomes their duty before acquiring the property to
make enquiries as to the amount of tax which is due or
which may be due and if they fail to make this enquiry
such failure amounts to a wilful abstention or gross
negligence within the meaning of Section 3 of the
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Transfer of Property Act and notice must be imputed to
them.”
18. Clause (g) of Sub-section (1) of Section 55 of the Transfer of
Property Act whereupon reliance has been placed by Mr. Sen reads as under
:
“In the absence of a contract to the contrary, the buyer and
the seller of immoveable property respectively are subject to
the liabilities, and have the rights, mentioned in the rules
next following, or such of them as are applicable to the
property sold:-
(1) The seller is bound -
(g) to pay all public charges and rent accrued
due in respect of the property up to the date of
the sale, the interest on all encumbrances on
such property due on such date, and, except
where the property is sold subject to
encumbrances, to discharge all encumbrances
on the property then existing.”
19. In terms of the aforementioned provisions, therefore, the seller is
bound to pay all public charges due in respect of the property upto the date
of sale, when a property is sold in auction. Section 55 refers to a contract
only. Unless there is a contract to the contrary, the rights and obligations of
the parties to a sale would be as indicated in Section 55. Such a contract to
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the contrary must be express and not implied, as a result whereof the
meaning of term encumbrance would be expanded.
The advertisement did not specify that all public charges have to be
paid.
Municipal Corporation indisputably is not a preferential creditor.
Companies Act in relation to winding up of proceeding is otherwise a
special law. While distributing the assets between the creditors and
unsecured creditors, the provisions of Sections 529 and 530 must be
complied with.
20. All claims against the companies were required to be filed before the
liquidator until the property was sold as provided for under Section 457 of
the Companies Act. In terms of Section 456 thereof once an order for
winding up is made the liquidator has to take into custody the properties,
effects and actionable claims to which the company is or appears to be
entitled. Section 528 provides that all debts payable on a contingency and
all claims against the company, present or future are admissible to proof
against the company. Section 529 provides for the same rule as in force for
the time being under the law of insolvency with respect to the estates of
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persons adjudged insolvent. Section 530 provides for certain priorities to
secured creditors and other unsecured creditors.
Once the property is sold, the assets of the company are required to be
distributed to the creditors in order of preference. As the respondent-
Municipality was not a secured creditor, the impugned Judgment cannot be
sustained.
21. Almost a similar question in regard to the dues of the electrical
charges came up for consideration before this Court in Isha Marbles Vs.
Bihar State Electricity Board and Anr. [1995 (2) SCC 648]. In that case
sale of the assets of industrial undertaking took place in terms of the
provisions of the State Financial Corporation Act, 1951. Having regard to
the provisions of the Indian Electricity Act, 1910 a three Judge Bench of
this Court held that a liability on the purchaser cannot be imposed which
was not incurred by them stating :
“63. We are clearly of the opinion that there is great
reason and justice in holding as above. Electricity is
public property. Law, in its majesty, benignly protects
public property and behoves everyone to respect
public property. Hence, the courts must be zealous in
this regard. But, the law, as it stands, is inadequate to
enforce the liability of the previous contracting party
against the auction-purchaser who is a third party and
is in no way connected with the previous
owner/occupier. It may not be correct to state, if we
hold as we have done above, it would permit
dishonest consumers transferring their units from one
hand to another, from time to time, infinitum without
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the payment of the dues to the extent of lakhs and
lakhs of rupees and each one of them can easily say
that he is not liable for the liability of the predecessor
in interest. No doubt, dishonest consumers cannot be
allowed to play truant with the public property but
inadequacy of the law can hardly be a substitute for
overzealousness.”
22. Dues of the Municipality would also not even otherwise come within
the purview of the crown debt. Even a crown debt could be discharged only
after the secured creditors stand discharged.
23. In Union of India & Ors . Vs. Sicom Ltd. & Anr . [ 2009 (1) SCALE
10] , it is stated :
“11. Generally, the rights of the crown to recover the
debt would prevail over the right of a subject. Crown
debt means the debts due to the State or the king; debts
which a prerogative entitles the Crown to claim priority
for before all other creditors. [See Advanced Law
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Lexicon by P. Ramanatha Aiyear (3 Edn.) p. 1147].
Such creditors, however, must be held to mean
unsecured creditors. Principle of Crown debt as such
pertains to the common law principle. A common law
which is a law within the meaning of Article 13 of the
Constitution is saved in terms of Article 372 thereof.
Those principles of common law, thus, which were
existing at the time of coming into force of the
Constitution of India are saved by reason of the
aforementioned provision. A debt which is secured or
which by reason of the provisions of a statute becomes
the first charge over the property having regard to the
plain meaning of Article 372 of the Constitution of
India must be held to prevail over the Crown debt
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which is an unsecured one. It is trite that when a
Parliament or State Legislature makes an enactment,
the same would prevail over the common law.
12. Thus, the common law principle which was
existing on the date of coming into force of the
Constitution of India must yield to a statutory
provision.
13. To achieve the same purpose, the Parliament
as also the State Legislatures inserted provisions in
various statutes, some of which have been referred to
hereinbefore providing that the statutory dues shall be
the first charge over the properties of the tax-payer.
This aspect of the matter has been considered by this
Court in a series of judgments.”
24. For the reasons aforementioned, the impugned judgment cannot be
sustained. It is set aside accordingly. The appeal is allowed with costs.
Counsel’s fee assessed at Rs.10,000/-
………………………….J.
[S.B. Sinha]
..…………………………J.
[Asok Kumar Ganguly]
New Delhi;
February 19, 2009