Court’s Decision
The Bombay High Court (Nagpur Bench) quashed revenue entries made by the Tahsildar in the 7/12 extract concerning auction-purchased property, holding that such charges were legally ineffective once the property had been sold in liquidation under the Insolvency and Bankruptcy Code, 2016 (IBC). The Court ruled that the property stood sold free of encumbrances and that the continuation of red entries in the revenue records was unlawful. It concluded that once the Liquidator had admitted claims of the Sales Tax Department and sold the property through an NCLT-approved liquidation process, the revenue entries could not survive
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Facts
The petitioner company participated in an auction conducted during the liquidation of Rasoya Proteins Ltd. pursuant to NCLT orders. The petitioner emerged as the highest bidder, paid the full consideration, and was issued a Sale Certificate confirming that the property was sold free of all encumbrances. However, despite these assurances, the petitioner later discovered charges recorded in the revenue records by the Tahsildar based on outstanding tax dues and a pending civil suit.
The Sales Tax Department and other authorities had earlier attached the properties for recovery of dues, but under the liquidation process, the Liquidator had admitted these claims for payment under Section 53 of the IBC. The petitioner argued that continuation of charges in the revenue records defeated the IBC’s clean slate principle and undermined the statutory priority mechanism
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Issues
- Whether revenue authorities could maintain encumbrances in the 7/12 extract after the property was sold in liquidation under the IBC.
- Whether statutory tax dues predating the insolvency could override the clean slate principle of the IBC.
- Whether the petitioner as an auction purchaser could be saddled with pre-existing liabilities despite the sale certificate stating the property was free of encumbrances.
Petitioner’s Arguments
The petitioner contended that the property was auctioned under the supervision of the NCLT and that the Sale Certificate explicitly confirmed it was sold free of encumbrances. Despite this, the Tahsildar unlawfully created charges in the revenue record without notice, contrary to Section 150 of the Maharashtra Land Revenue Code.
It was submitted that statutory dues had to be lodged before the Liquidator in terms of the IBC, and once admitted, could not attach to the property itself. Reliance was placed on judicial precedents affirming that liquidation sales under the IBC pass assets free of prior liabilities. The petitioner emphasized that the continuance of red entries impeded its ownership rights and directly conflicted with the principle of finality in insolvency resolution.
Respondents’ Arguments
The State and Tahsildar argued that statutory tax dues constituted a first charge on the property under the Maharashtra Value Added Tax (MVAT) Act, 2002, which survived liquidation. They stressed that revenue entries were valid as the dues preceded the initiation of insolvency proceedings.
It was further argued that under Section 55 of the Transfer of Property Act, sellers are obliged to disclose encumbrances, and that the Liquidator failed in this duty. The respondents claimed that the MVAT Act, as amended with retrospective effect, created overriding first charges, and that recovery authorities were not bound to withdraw attachments merely because of liquidation.
Additionally, reliance was placed on internal circulars clarifying that NCLT-appointed liquidators had no jurisdiction to compel withdrawal of statutory attachments.
Analysis of the Law
The Court analyzed the interplay between the IBC, Transfer of Property Act, MVAT Act, and Maharashtra Land Revenue Code. It reiterated that once liquidation is ordered, the Liquidator assumes control of all assets, which vest in him free of encumbrances. Section 53 of the IBC lays down a priority waterfall for distribution of liquidation proceeds, binding upon all stakeholders including government authorities.
The Court emphasized that statutory first charges under tax laws cannot override the IBC’s scheme, as the Code is a complete and special legislation. Any contrary interpretation would defeat the clean slate principle and frustrate insolvency resolution.
Precedent Analysis
The Court referred extensively to prior judgments:
- Pramod Moreshwar Tattu v. SDO, Baramati (2018 Bom HC) — clarified that lis pendens entries are to be recorded in revenue records to keep public authorities informed.
- Su-Kam Power System Ltd. v. State of Himachal Pradesh (2024 HP HC) — held that continuation of tax charges after liquidation violates the clean slate principle under the IBC
- KRBL Ltd. v. State of Gujarat (2023 Guj HC) — affirmed that once a resolution plan is approved, all claims not forming part of it stand extinguished and cannot be enforced against the corporate debtor
- Rana Girders Ltd. v. Union of India (2013 SC) — clarified that statutory liabilities not arising directly out of the land or property cannot be imposed on the purchaser
- Indian Overseas Bank v. Deputy Commissioner of State Tax (2024 Bom HC) and Bhaurao Chavan Sahakari Sakhar Karkhana Ltd. v. State of Maharashtra (2017 Bom HC) — reinforced the principle that secured creditors and statutory dues are to be treated under the IBC waterfall, not through independent attachments
These precedents collectively established that auction purchasers under the IBC acquire property free of encumbrances.
Court’s Reasoning
The Court held that once the NCLT ordered liquidation, the assets vested in the Liquidator, and no proceedings could be initiated against the corporate debtor under Section 33(5) of the IBC. It noted that the Liquidator had already admitted the Sales Tax Department’s claims of over ₹34 crore, and therefore, dues were to be recovered from sale proceeds, not by attaching the property.
The Court stressed that continuing charges in the revenue record not only violated the clean slate principle but also rendered the sale certificate meaningless. It emphasized:
“Once the Official Liquidator admits the claims of the Sales Tax Department and the property is sold free of all encumbrances, the entry of charge in the 7/12 extract is of no effect.”
Conclusion
The writ petition was allowed. The Court quashed and set aside Revenue Entries No. 2081 (2018) and No. 1986 (2016) recorded by the Tahsildar at the behest of the Sales Tax Department and other parties. The respondents were directed to remove the charges from the 7/12 extract. The Court clarified that statutory dues, once admitted in liquidation, could not operate as encumbrances on auction-purchased property.
Implications
This ruling strengthens the IBC’s clean slate doctrine, assuring auction purchasers that assets acquired in liquidation are free from past liabilities. It also reinforces the supremacy of the IBC over state revenue recovery laws, ensuring consistency in insolvency resolution. Importantly, it prevents conflicting claims by State authorities from derailing the liquidation process and provides much-needed certainty to bidders in insolvency auctions.
FAQs
Q1. Can revenue authorities maintain encumbrances after liquidation sales under IBC?
No. The Bombay High Court held that once property is sold in liquidation, all encumbrances stand extinguished and revenue entries cannot survive.
Q2. Are statutory tax dues a first charge that overrides the IBC?
No. The Court ruled that statutory charges must be admitted as claims in liquidation and settled under Section 53 of the IBC, not enforced against the property
Q3. What is the effect of a Sale Certificate issued under liquidation?
A Sale Certificate confirms that property is sold free of encumbrances. Any red entries in revenue records contrary to this are void in law