2019 (9) TMI 1495 - HC - Indian Laws

Demand of outstanding dues towards the property tax or maintenance charges from the respondent - sale of property by Bank to respondent free from all encumbrances - whether an authorized officer is under obligation to disclose pre-sale tax dues on secured asset as an encumbrance in the notice under the proviso to Rule 8(6) (a) and (f) or the authorized enjoys a statutory immunity under rule 9(7) of the said Rules and the auction purchaser may be allowed to deposit with him the money required to discharge any such encumbrance? HELD THAT - Rule 8(6)(a) of the Security Interest (Enforcement) Rules 2002 imposes an obligation upon the authorized officer to disclose by a public notice the description of the immovable property to be sold including details of the encumbrances known to the secured creditor when the secured asset is decided to be sold by either inviting tenders or by holding public auction. Under clause (f) of sub-rule (6) of Rule 8 the authorized officer is also bound to disclose any other thing which he considers material for a purchaser to know in order to judge the nature and value of the property. Learned Senior Counsel for the appellant vehemently argues that the appellant- Bank or its officers cannot be fastened with the obligation for alleged nondisclosure of pre-sale municipal tax dues as encumbrance while issuing notice under section 8(6) of the said Rules as the sale was conducted as is where is and as is what is basis; secondly property tax dues were not known to the authorized officer; thirdly even if such encumbrance was disclosed the purchaser would have been directed to deposit such amount for discharging such encumbrance; and fourthly Clause E of the terms of E-auction sale notice imposed equal obligation upon the purchaser to make independent enquiries regarding encumbrances and title of the secured asset. Therefore after completion of sale process and delivery of possession of the secured asset in favour of the respondent he cannot claim refund of pre-sale municipal tax dues from the Bank. In HARYANA FINANCIAL CORPORATION VERSUS RAJESH GUPTA 2009 (12) TMI 995 - SUPREME COURT the Hon ble Supreme Court distinguished the powers of secured creditor and the official liquidator in selling the property and held that an official liquidator does not hold any guarantee or warrantee in respect of the property sold. Under the SARFAESI Act the secured creditor or the authorized officer on its behalf exercises the right of an owner selling the property. Thus the Hon ble Supreme Court held that the principles laid down in the case of UNITED BANK OF INDIA VERSUS OFFICIAL LIQUIDATOR 1993 (10) TMI 231 - SUPREME COURT is not applicable in case of sale of secured asset under the SARFAESI Act. Rules 8 and 9 deal with the stage anterior to the issuance of sale certificate and delivery of possession. Rule 9(8) casts a duty upon the authorized officer to deliver the property to the purchaser free from encumbrances requiring the purchaser to deposit money for discharging the encumbrances. The ignorance of the second creditor regarding the encumbrance on the property is no longer a good and acceptable defence in view of the statutory provisions - In the instant case it is not disputed that the appellant-Bank did not disclose pre-sale property tax dues which is a charge on the land or building in respect of the secured asset. Therefore the appellant-Bank has failed to discharge its statutory obligation and after completion of sale and delivery of possession the auction purchaser-respondent cannot be fastened with the liability to discharge such encumbrances. This is more so because the Bank or its authorized officer failed to disclose the encumbrance to the purchaser and claim money for discharge of such encumbrance under Rule 9(7) of the said Rules 2007. Appeal dismissed - decided against appellant.

Summary

Issues Involved:
1. Liability for pre-sale property tax and maintenance charges.
2. Maintainability of the writ petition under Article 226.
3. Applicability of the "as is where is" and "as is what is" basis.
4. Obligation to disclose encumbrances under SARFAESI Act and Rules.
5. Interpretation of "encumbrance" in the context of property sales.

Issue-wise Detailed Analysis:

1. Liability for Pre-sale Property Tax and Maintenance Charges:
The respondent successfully participated in an E-auction for an immovable property conducted by the appellant bank under the SARFAESI Act. After purchasing the property, the respondent was charged with property tax and maintenance tax for the period prior to the auction. The respondent contended that he was not liable for these taxes and sought reimbursement from the bank. The learned Single Judge ruled that the bank was liable to reimburse the respondent, stating, "The sale certificate issued by the bank is in accordance with the Security Interest (Enforcement) Rules, 2002... The bank is, therefore, liable to bear the property tax dues for the period up to the date of the sale."

2. Maintainability of the Writ Petition under Article 226:
The appellant argued that the writ petition seeking reimbursement of money paid towards outstanding property tax was essentially a money claim and should not have been entertained by the writ court. The court, however, maintained that the writ petition was valid, stating, "The point of maintainability raised is without substance. The purchaser of an immovable property is before the writ court for the failure of an instrumentality with the meaning of Article 12 of the Constitution of India."

3. Applicability of the "As Is Where Is" and "As Is What Is" Basis:
The appellant bank contended that the sale was conducted on an "as is where is" and "as is what is" basis, which was clearly stated in the auction notice. Clause E of the terms and conditions required bidders to make independent inquiries regarding encumbrances. The court, however, found that the bank had an obligation to disclose known encumbrances, stating, "The correspondence produced on record established that, the bank was aware of the arrears on account of maintenance charges in respect of the property concerned prior to the sale."

4. Obligation to Disclose Encumbrances under SARFAESI Act and Rules:
The appellant argued that even if the encumbrances were known, the purchaser was liable to pay them under Rule 9(7) to Rule 9(10) of the Security Interest (Enforcement) Rules, 2002. The court held that the bank had failed to disclose the encumbrances as required under Rule 8(6)(a), stating, "The authorised officer shall serve to the borrower a notice of thirty days for sale of the immovable secured assets, under sub-rule (5)... The description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor."

5. Interpretation of "Encumbrance" in the Context of Property Sales:
The court discussed the definition of "encumbrance" and its implications for property sales. It referred to various legal precedents and definitions, concluding that municipal tax is a charge within the meaning of Section 100 of the Transfer of Property Act. The court stated, "Encumbrance, therefore, must be capable of being found out either on inspection of the land or the office of Registrar or a statutory authority... Encumbrance thus must be a charge on the property. It must run with the property."

Conclusion:
The court dismissed the appeal, holding that the bank had a statutory obligation to disclose known encumbrances and could not shift the burden of pre-sale property tax and maintenance charges to the purchaser. The judgment emphasized that the SARFAESI Act and Rules have replaced the rule of caveat emptor with caveat venditor, making it the bank's responsibility to sell the property free from encumbrances.