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

Company Judge by an Order dated 15th September, 2006.  

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 15th September,  2006  would  make  the  applicant liable  for  payment  of  property  tax  only  on  and from  the  date  of  confirmation  of  sale  i.e.  15th September,  2006  and  not  for  any  period  prior thereto;

(b) Order  dated  15th 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 prior to 15th 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 prior to 15th September, 2006.

(e) Injunction  restraining  the  respondent  no.  2  from giving any effect and/or further effect to the notice dated  15th February,  2007  and  6th 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.”

  5. By reason of an order dated 7th 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  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.”

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 Lexicon  by P. Ramanatha Aiyear (3rd 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

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