HC Ahmedabad (18.04.2022) in M/s Alpesh Gems Vs Surat Municipal Corporation [R/Special Civil Application No. 4905 of 2022] held that
Section 141(1) of the Bombay Provincial Municipal Corporation Act merely created a charge in express language; this charge was subject to prior payment of land revenue due to the State Government on such building or land;
the Section, apart from creating a statutory charge, did not further provide that this charge was enforceable against the property charged in the hands of a transferee for consideration without notice of the charge;
Section 100 of the Transfer of Property Act was the general prohibition that no charge could be enforced against any property in the hands of a transferee for consideration without notice of the charge;
According to Section 3 of the Transfer of Property Act, which is described as the interpretation clause, a person is said to have notice of a fact when he actually knows that fact or when, before wilful abstention from an enquiry or search which he ought to have made or gross negligence, he would have known it;
A charge may not be enforced against a transferee if s/he has had no notice of the same, unless, by law, the requirement of such notice has been waived.
Excerpts of the order;
# 1 By this writ application under Article 226 of the Constitution of India, the writ applicant has prayed for the following reliefs:
“(a) That the Hon’ble Court be pleased to issue a writ of mandamus and/or a writ in the nature of mandamus and/or any other appropriate writ, order or direction directing the Surat Municipal Corporation to demand/recover the property tax dues aggregating to Rs.19,87,171/- for the period prior to 26.02.2021 from the Liquidator of Kohinoor Diamonds Private Limited;
(b) That the Hon’ble Court may be pleased to issue a writ of mandamus and/or a writ in the nature of mandamus and/or any other appropriate writ, order or direction directing the Surat Municipal Corporation to lodge a claim with respondent No.2 for the property tax dues with respect to the subject property for the period prior to 26.02.2021 in accordance with law, if at all the said tax dues are to be recovered;
(c) That the Hon’ble Court may be pleased to issue a writ of mandamus and/or a writ in the nature of mandamus and/or any other appropriate writ, order or direction directing the Surat Municipal Corporation to issue bills for recovery of property tax with respect to the subject property for the period after 26.02.2021, if at all the said tax is to be levied;
(d) Pending the hearing and final disposal of this petition, the Hon’ble Court may be pleased to restrain the Surat Municipal Corporation from taking any coercive measures against the petitioner and/or the subject property with respect to the property tax dues aggregating to Rs.19,87,171/- for the period prior to 26.02.2021;
(e) Ad-interim relief in terms of prayer clause (c) hereinabove;
(f) Such other and further reliefs that the Hon’ble Court deems fit in the interest of justice.”
# 2 The facts giving rise to this writ application may be summarized as under:
# 3 The writ applicant is a partnership firm. The firm is engaged in the business of Diamonds. The subject matter of dispute is an immovable property in the form of 12 units admeasuring 12,996 sq. ft. situated at Ashoka Tower, Kesarba Market, Gotalwadi, Katargam, Surat. The subject property was earlier owned by the Kohinoor Diamonds Private Limited.
# 4 It appears that the Corporate Insolvency Resolution Process was initiated for the Kohinoor Diamonds by the National Law Tribunal, Ahmedabad Bench in the C. P. (IB) No.206/NCLT/AHM/2017. However, the resolution process was unsuccessful and vide order dated 13th November 2018, the company went into liquidation and the respondent No.2 herein was appointed as the Official Liquidator.
# 5 It also appears that the Liquidator vide his letter dated 18th September 2020 informed the Surat Municipal Corporation about the initiation of the liquidation process of the Kohinoor Diamonds.
# 6 In the process of liquidation, a public advertisement dated 1st February 2021 was issued for E-auction of the subject property at a base price of Rs.2,33,31,000/-. The writ applicant participated in the Eauction proceedings and was declared as a successful bidder. The writ applicant paid the entire sale consideration of Rs.2,35,31,000/- to the Liquidator. The writ applicant was put in possession of the subject property. A formal deed of the sale transaction is yet to be executed by the Official Liquidator in favour of the writ applicant.
# 7 It is the case of the Surat Municipal Corporation that it has to recover an amount of Rs.19,87,171/- from the Kohinoor Diamonds towards arrears of property tax. According to the Surat Municipal Corporation, it has the first right or precedence to recover this amount towards arrears of property tax from the immovable assets of the Kohinoor Diamonds. To put it in other words, the Surat Municipal Corporation has an objection as regards the proceedings undertaken by the Liquidator of putting the subject property to E-auction.
# 8 The writ applicant had to come before this Court with the present writ application as despite the fact that the writ applicant has purchased the subject property in the E-auction proceedings conducted by the Liquidator, the Surat Municipal Corporation thought fit not to issue any property tax bills to the writ applicant for the period after the auction proceedings. Prima facie, it appears that the writ applicant has an apprehension that since the Surat Municipal Corporation has thought fit not to issue the property tax bills in the name of the writ applicant, it has declined to recognize the writ applicant as the lawful owner of the subject property. The writ applicant clarified with the Surat Municipal Corporation that it is liable to pay property tax for the period after the auction proceedings and not for the liability which Kohinoor Diamonds incurred in the past i.e. before the liquidation proceedings.
# 9 We have heard Mr. Aadit R. Sanjanwala, the learned counsel appearing for the writ applicant, Mr. Chandresh Vin, the learned counsel appearing for the Surat Municipal Corporation and Mr. Vishal Dave, the learned counsel appearing for the respondent No.2 (Official Liquidator).
# 10 The short point that falls for our consideration is whether the Surat Municipal Corporation can claim any first charge or precedence over the subject property for the purpose of recovering the arrears towards the liability of property tax incurred by the Kohinoor Diamonds by virtue of Section 141 of the Gujarat Provincial Municipal Corporations Act, 1949 (for short, the GPMC Act”).
# 11 It is not in dispute that what is sought to be recovered by the Surat Municipal Corporation from the erstwhile Kohinoor Diamonds are the statutory dues towards the property tax.
# 12 As observed by the Supreme Court in the case of AI Champday Industries Ltd vs. Official Liquidator and another reported in (2009) 4 SCC 486, if the property tax was merely a statutory dues without creating any encumbrance on the property, then it is not obligatory on the part of the auction purchasers to make an investigation as regards the title etc. It would mean that auction purchasers need not find out all the liabilities of the company in liquidation in their entirety.
# 13 We cannot find any fault with the Official Liquidator in putting the subject property to E-auction. We also cannot find any fault with the writ applicant in participating in the auction proceedings. It is not in dispute that the writ applicant was the successful bidder. We quote the relevant observations made by the Supreme Court in the case of AI Champday Industries Ltd (supra) as under:
“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.
13. We may however notice some dictionary meanings of the said word as reliance thereupon has been placed by Mr. Sibaji Sen. In Stroud's Judicial Dictionary of Words and Phrases 5th 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."
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.
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.
15. 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.
16. 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.
17. 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 :
"12…...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."”
# 16 The matter on hand can be examined from a different angle too. In the case of AI Champday Industries Ltd (supra) referred to above, we find reference of the decision of the Supreme Court in the case of Ahmedabad Municipal Corporation vs. Haji Abdul Gafur Haji Hussenbhai reported in (1971) 1 SCC 757. We must give some idea how this litigation originated and reached upto the Supreme Court.
# 17 In Ahmedabad Municipal Corporation of the City of Ahmedabad (supra), the defaulter was in arrears of property tax due under the Bombay Provincial Municipal Corporation Act, and the property was brought to sale in execution of a mortgage decree. When the municipality purported to exercise their charge over the property, the purchaser, in the court auction, filed a suit for declaration that he was the owner of the property and, therefore, arrears of municipal taxes due by the transferor were not recoverable by attachment and sale of the property in the hands of the purchaser. A Division Bench of this High Court in the case of Haji Abdul Gafuf Haji Hussenbhai vs. The Ahmedabad Municipal Corporation reported in (1967) 8 GLR page 65 accepted the case of the purchaser, and decreed the suit, holding that the charge created in favour of the municipal corporation was not enforceable against the property. Before the Supreme Court it was contended that there was an express provision in Section 141(1) of the Bombay Provincial Municipal Corporation Act, 1949 for holding the present property to be liable for the recovery of municipal taxes, and, though the property was subject only to a charge not amounting to mortgage and did not involve transfer of interest in the property, the same could nevertheless be sold, for realizing the amount charged, even in the hands of a transferee for consideration without notice; Section 141 was an express saving provision as contemplated by Section 100 of the Transfer of Property Act; the saving provision, contemplated by Section 100 of the Transfer of Property Act, without using express words, could, in effect, provide that the property was liable to sale in enforcement of the charge; if this liability was fixed by a provision expressly dealing with the subject, then the charge would be enforceable against the property even in the hands of a transferee for consideration without notice of the charge; it was not necessary for the saving provision to expressly provide for the enforceability of the charge against the property in the hands of a transferee for consideration without notice of the charge; the plaintiff must be deemed to have constructive notice of the arrears of municipal taxes; as an auction purchaser, he must be held liable to pay these taxes; and the property purchased must also be held subject to this liability in his hands.
# 18 It is in the aforesaid context that the Supreme Court held that Section 141(1) of the Bombay Provincial Municipal Corporation Act merely created a charge in express language; this charge was subject to prior payment of land revenue due to the State Government on such building or land; the Section, apart from creating a statutory charge, did not further provide that this charge was enforceable against the property charged in the hands of a transferee for consideration without notice of the charge; what was enacted in the second half of Section 100 of the Transfer of Property Act was the general prohibition that no charge could be enforced against any property in the hands of a transferee for consideration without notice of the charge; the exception to this general rule must be expressly provided by law; the real core of the saving provision of the law must not be the 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 was clearly not such a provision; according to Section 3 of the Transfer of Property Act, which is described as the interpretation clause, a person is said to have notice of a fact when he actually knows that fact or when, before wilful abstention from an enquiry or search which he ought to have made or gross negligence, he would have known it; there were three explanations to this definition dealing with three contingencies when a person acquiring immovable property is to be deemed to have notice of certain facts; the circumstances, which by a deeming fiction, impute notice to a party are based on his wilful abstention to enquire or search which a person ought to make or on his gross negligence; this presumption of notice is commonly known as constructive notice; though originating in equity, this presumption of notice is now a part of the statute and has to be interpreted as such; wilful abstention suggests conscious or deliberate abstention and gross negligence, and is indicative of a higher degree of neglect; negligence is, ordinarily, understood as an omission to take such reasonable care as, under the circumstances, is the duty of a person of ordinary prudence to take; in other words, it is an omission to do something which a reasonable man, guided by consideration which normally regulate the conduct of human affairs, would do or doing something which a normally prudent and reasonable man would not do; the question of wilful abstention or gross negligence and, therefore, of constructive notice considered from this point of view is generally a question of fact or at best a mixed question of fact and law depending primarily on the facts and circumstances of each case; except for cases directly falling within the three explanations, no inflexible rule can be laid down to serve as a straight- jacket covering all possible contingencies; the question is not whether the purchaser had the means of obtaining, and might with prudent caution have obtained, knowledge of the charge, but whether in not doing so he acted with wilful abstention or gross negligence; and, being a question depending on the behaviour of a reasonably prudent man, the Courts have to consider it in the background of Indian conditions.
# 19 In Deputy Tax Commercial Tax Officer vs. R. K. Steels Ltd. (1998) 108 STC 161 (Mad), a Division Bench of the Madras High Court held that the judgment of the Supreme Court, in Ahmedabad Municipal Corporation (supra), was comprehensive in all respects, and should be taken note of while dealing with the cases of a transferee for value without constructive notice of sales tax arrears; the emphasis laid down by the Supreme Court, to avoid Section 100 of the Transfer of Property Act, was to have an express provision providing for the contrary; mere enforcement of a charge, resorting to the Revenue Recovery Act, was not an answer to Section 100 of the Transfer of Property Act; Section 24(2) of the Tamil Nadu General Sales Tax Act did not provide anything contrary to Section 100 of the Transfer of Property Act; and unless a provision was made in any statute, contrary to the rule of Section 100 of the Transfer of Property Act, a bona fide purchaser for consideration, without notice of the charge, was protected.
# 20 In State of Karnataka vs. Shreyas Papers (P) Ltd. [(2006) 144 STC 331 (SC)], it was contended before the Supreme Court that, since Section 13(2)(i) of the Karnataka Sales Tax Act created a charge on the property of the defaulting company, the charge would continue on the properties even if it changes hands by transfer. It is in this context that the Supreme Court held:-
“..While the expression "charge" is not defined by the KST Act, this concept is well known in property law and has been defined by Section 100 of the Transfer of Property Act, 1882 (hereinafter "the TP Act") … As the section itself unambiguously indicates, a charge may not be enforced against a transferee if s/he has had no notice of the same, unless, by law, the requirement of such notice has been waived. This position has long been accepted by this Court in Dattatreya Shanker Mote v. Anand Chitaman Datar, and Ahmedabad Municipal Corporation of the City of Ahmedabad v. Haji Abdul Gafur Haji Hussenbhai (hereinafter "Ahmedabad Municipal Corporation"). In this connection, we may refer to the latter judgment, which is particularly relevant for the present case In these circumstances, we are of the view that the First Respondent was a purchaser for value without notice of the sales tax arrears of the Defaulting Company or the consequent charge on the property. This would, therefore, attract the principle laid down by this Court in Ahmedabad Municipal Corporation, which is also embodied in the proviso to Section 100 of the TP Act. Thus, the property in the hands of the First Respondent was free of the charge and it is not open to the appellants to enforce the liabilities of the Defaulting Company in this manner against the First Respondent. The High Court, rightly in our view, held that the First Respondent before us was not liable for the tax arrears of the Defaulting Company. No issue as to the liability of the Corporation was raised or argued before, or decided by the High Court. In the present case, firstly, no provision of law has been cited before us that exempts the requirement of notice of the charge for its enforcement against a transferee who had no notice of the same. It remains to be seen, therefore, if in the facts of the present case, the first respondent had notice actual or constructive of the charge. .
..Thus, it is evident that the first respondent had no actual notice of the charge prior to the transfer. As to whether the first respondent had constructive notice of the charge, no substantive argument on this issue was made, either before the High Court or at any rate before us. Hence, we cannot hold that the first respondent had constructive notice of the charge. In these circumstances, we are of the view that the first respondent was a purchaser for value without notice of the sales tax arrears of the defaulting company or the consequent charge on the property. This would, therefore, attract the principle laid down by this Court in Ahmedabad Municipal Corpn. (supra) which is also embodied in the proviso to Section 100 of the TP Act. Thus, the property in the hands of the first respondent was free of the charge and it is not open to the appellants to enforce the liabilities of the defaulting company in this manner against the first respondent...” (emphasis supplied).
# 21 In Rukmani vs. Deputy CTO (Mad) [(2013) 62 VST 369], the Madras High Court held that, as the proviso to Section 24-A of the T.N.G.S.T. Act itself indicated, a charge may not be enforced against a transferee if he/she has had no notice of the same unless, by law, the requirement of such notice had been waived; the principle laid down, in Ahmedabad Municipal Corporation (supra), had been applied in Shreyas Papers P.Ltd (supra); though the respondent had contended that the petitioner ought to have obtained a 'No Objection' from the revenue, before purchasing the property, no provision had been quoted by the respondent in the counter affidavit; a purchaser, in the normal course, would only verify from the Registration Department as to whether the property to be purchased has any encumbrance; unless the charge is duly registered in the Registration Department, it would not be possible for any prospective buyer to know whether there is any charge over the property for arrears of tax or statutory dues to be paid to the Government or statutory body; no material had been produced before the Court to prove that the notice, demanding arrears of tax, had been served on the defaulter; no material had been placed before the Court to prove that steps had been taken, under the provisions of the Revenue Recovery Act, against the defaulter or the subsequent first purchased from whom the petitioner had purchased the property six years after the date of finalisation of the assessment; there was no material to indicate that the petitioner had any constructive notice of the charge; there was no pleading to that effect and, rightly, no arguments had been advanced; and, therefore, the Court was of the view that the case on hand would squarely fall within the ambit of the judgment of the Apex Court in Ahmedabad Municipal Corporation (supra).
22 At this stage, we may also refer to few provisions of the Insolvency and Bankruptcy Code, 2016 (for short, “the Code, 2016”). Section 14 provides for Moratorium. Section 14 reads thus: . . . . . . . .
# 23 We are concerned with sub-clause (b) of sub-section (1) of Section 14 of the Code, 2016. Thus, on the insolvency commencement date, the Adjudicating Authority would have to declare moratorium by an order prohibiting transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or interest therein.
# 24 Section 38 of the Code, 2016 provides for consolidation of claims. Section 38 of the Code, 2016 reads thus:
“38. Consolidation of claims.- (1) The liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process.
(2) A financial creditor may submit a claim to the liquidator by providing a record of such claim with an information utility: Provided that where the information relating to the claim is not recorded in the information utility, the financial creditor may submit the claim in the same manner as provided for the submission of claims for the operational creditor under sub-section (3).
(3) An operational creditor may submit a claim to the liquidator in such form and in such manner and along with such supporting documents required to prove the claim as may be specified by the Board.
(4) A creditor who is partly a financial creditor and partly an operational creditor shall submit claims to the liquidator to the extent of his financial debt in the manner as provided in sub-section (2) and to the extent of his operational debt under sub-section (3).
(5) A creditor may withdraw or vary his claim under this section within fourteen days of its submission.”
# 25 In the last, we may look into Section 238 of the Code, 2016, which reads thus:
“238. Provisions of this Code to override other laws.- The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
# 26 The only option now left with the Surat Municipal Corporation is to put forward its claim with the Liquidator as one of the creditors who has to recover a particular amount towards property tax from Kohinoor Diamonds.
# 27 In view of the aforesaid, we declare that the Surat Municipal Corporation cannot claim any first charge or precedence over the subject property by virtue of Section 141 of the BPMC Act. The auction proceedings have attained finality. The writ applicant as on date is the lawful owner of the subject property. The Surat Municipal Corporation may recover the property tax from the writ applicant from the date of purchase of the subject property in the E-auction proceedings. If the entries as regards the sale in the revenue record of rights have not been mutated, the revenue authority shall proceed to do so in favour of the writ applicant.
# 28 We reserve the liberty in favour of the Surat Municipal Corporation to recover the requisite amount towards the property tax by taking up the issue with the Official Liquidator i.e. the respondent No.2 in accordance with the provisions of the Companies Act.
# 29 At this stage, Mr. Sanjanwala pointed out that the Official Liquidator has yet to execute the sale deed in favour of his client. The Official Liquidator shall now proceed to execute the sale deed in accordance with law.
# 30 With the aforesaid, this writ application stands disposed of.
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Blogger’s Comments; I think the question for consideration before the Hon’ble Court should have been;
“ Whether a secured creditor can enforce security interest beyond the provisions of the Code (I & BC,2016), after liquidation of a company has been ordered by Adjudicating Authority under the provisions of the Code, irrespective of the constructive notice of the charge (Statutory or otherwise) on the property.”
After public announcement by the liquidator under section 35(1)(j), its obligatory on the part of all the creditors to file claims with the Liquidator. Statutory Dues have been defined as operational debt;
Section 3 (11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;
Section 5 (21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the 2[payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;
Section 52 of the Code provides the option to a secured creditor, either to enforce his security interest or to relinquish his security interest in favour of the Liquidator and receive the proceeds of realisation of the assets as per the priority laid down under Section 53.
In my opinion, none of the charge holders (statutory or otherwise) on the property of the company can proceed against the auction purchaser of the property after the Liquidation order has been issued by the Adjudicating Authority.
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