2009 (2) TMI 470 - SC - Companies Law

Winding up - Overriding preferential payments - Dues in relation to the Municipal Tax - Held that - Appeal allowed. 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. 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.

Issues Involved:
1. Liability for payment of arrears of property tax.
2. Interpretation of "as is where is" sale conditions.
3. Applicability of sections 529 and 529A of the Companies Act, 1956.
4. Definition and implications of "encumbrance".
5. Rights and obligations under section 55 of the Transfer of Property Act.
6. Priority of municipal tax dues in liquidation.

Detailed Analysis:

1. Liability for Payment of Arrears of Property Tax:
The appellant contended that it was not liable for property tax arrears prior to the date of purchase and that such dues should be adjusted from the sale proceeds. The respondent-municipality claimed the appellant was responsible for the arrears. The Court held that municipal tax dues do not create an encumbrance on the property and are considered a personal liability. The purchaser is not liable for arrears prior to the purchase date, and the municipality, as an unsecured creditor, must claim from the sale proceeds.

2. Interpretation of "As Is Where Is" Sale Conditions:
The sale was conducted on an "as is where is and whatever there is" basis. The Court clarified that this condition pertains to the physical state of the assets and does not extend to liabilities such as property taxes. The purchaser is deemed to have inspected the property and accepted its physical condition, but this does not imply acceptance of prior liabilities.

3. Applicability of Sections 529 and 529A of the Companies Act, 1956:
The Court emphasized that the manner of realizing claims against a company in liquidation is governed by sections 529 and 529A. The municipality did not file its claim with the Official Liquidator and thus could not claim arrears from the purchaser. The claims should have been settled from the sale proceeds as per the priority established in these sections.

4. Definition and Implications of "Encumbrance":
The term "encumbrance" was analyzed in various legal dictionaries, indicating a claim, lien, or liability attached to property. The Court concluded that encumbrance must be a charge on the property, capable of being discovered through inspection or official records. Since municipal tax dues do not create such a charge, they do not constitute an encumbrance.

5. Rights and Obligations under Section 55 of the Transfer of Property Act:
Section 55(1)(g) obligates the seller to pay all public charges up to the date of sale unless there is a contract to the contrary. The Court found no such contract in the sale terms, implying that the seller (company in liquidation) was responsible for property tax arrears, not the purchaser.

6. Priority of Municipal Tax Dues in Liquidation:
The Court noted that municipal tax dues are not preferential claims and must be settled alongside other unsecured creditors. The Companies Act provides a specific order of priority for distributing assets, and the municipality, lacking secured creditor status, cannot claim priority over other unsecured creditors.

Conclusion:
The Supreme Court set aside the impugned judgment, ruling that the appellant was not liable for property tax arrears prior to the purchase date. The municipality's claim should have been addressed through the liquidation process, adhering to the priority established under the Companies Act. The appeal was allowed with costs assessed at Rs. 10,000.

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