Home » Between The Lines » Gujarat HC: Purchaser of an asset in a liquidation process is not liable for payment of government dues which were not substantiated adequately during the CIRP and not lodged with the liquidator

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The Gujarat High Court (“Gujarat HC”) has, by its judgment pronounced on September 22, 2023, in the matter of KRBL Limited v. State of Gujarat [C/SCA/19804/2022], held that the purchaser of an asset in a liquidation process of a corporate debtor is not responsible for payment of any government dues, if the claim was not adequately substantiated during the Corporate Insolvency Resolution Process (“CIRP”) and on failure to lodge the claim with the liquidator.


The Mumbai bench of National Company Law Tribunal (“NCLT”), vide its order dated January 17, 2020, admitted insolvency proceedings initiated against M/s. Gran Electronics Private Limited (“Corporate Debtor”) by Universal Digital Connect Limited. The claim of Sales Tax Department (“Respondent”) of an amount of INR 77,08,69,644 was rejected by the resolution professional on inadequacy of proof.

Thereafter, an application to liquidate the Corporate Debtor was admitted by NCLT on February 12, 2021. The Respondent failed to register its claim with the liquidator, despite a letter dated February 23, 2021 being issued by the liquidator to Assistant Commissioner of Tax. The liquidator initiated the sale of assets of Corporate Debtor by means of an e-auction. KRBL Limited (“Petitioner”) purchased a piece of land, which was a part of the liquidation corpus of the Corporate Debtor. The purchase was recorded vide sale deed dated December 17, 2021 containing an express stipulation thereunder that the Petitioner will not be responsible to pay any due amount to the government, since it will be dealt with in the manner specified in Section 53(1) of Insolvency and Bankruptcy Code, 2016 (“IBC”).

The Gram Panchayat of Varsamedi intimated the Corporate Debtor to pay outstanding property tax. The liquidator informed the Panchayat that any dues other than secured, unsecured or of the workman and employees, including the dues of Respondent, will fall under operational creditors. Vide notice dated January 10, 2022, the Respondent intimated attachment of the land in question. A pencil entry bearing no. 4454 was mutated in favor of the Petitioner. On a request made by the Petitioner on February 16, 2022, to certify the entry, the Talati-cum-Mantri refused to do so on the ground of existence of a charge of the Respondent. By the impugned order dated January 5, 2022, the Respondent demanded an amount of INR 56,01,79,095 towards outstanding GST dues and mutated entry no. 6295, inter alia, recording a charge on the property of the Respondent. Hence, the Petitioner approached the Gujarat HC with a writ petition under Article 226 of the Constitution of India to certify the entry no. 4454 in revenue record and to set aside order dated January 5, 2022 and further to set aside the consequential entry no. 6295 mutated in the revenue record petition.


Whether the purchaser of an asset in an auction is liable to pay the government dues which are not lodged with the liquidator at the time of liquidation process.


Contentions of the Petitioner:

The Petitioner submitted that IBC is a complete code which deals with solutions on a holistic perspective concerning a company and all stakeholders, including the company, creditors, purchasers start with a ‘clean slate’. The Petitioner to strengthen its arguments, placed reliance on Ghanshayam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [(2021)/ 9/ SCC/ 657], wherein the Supreme Court held that a successful resolution applicant cannot suddenly be faced with an undecided claim after a resolution plan submitted by him has been approved.

The Petitioner also emphasized, while relying on the Paschimanchal Vidhyut Vitran Nigam Limited v. Raman Ispat Private Limited and others [Civil Appeal No. 7976 of 212] (“Paschimanchal Case”), that Sections 52 (Secured Creditor in liquidation proceedings) and 53 (Distribution of assets) are complete and comprehensive and all rights even of secured creditors in the secured assets stands diluted and compromised. Once a property is sold by the liquidator in the public auction and on “as is where is basis,” a secured creditor cannot be allowed to assert an entry for the asset once sold.

The Petitioner further submitted that even as per Section 100 (Charges) of Transfer of Property Act, 1882 (“TPA”), a charge created by operation of law or otherwise is not mortgage, and a charge cannot be enforced against any property in the hands of the person to whom such property has been transferred for consideration and without any notice of charge. The Petitioner had no notice of pending government dues, and as such is not liable to pay the government dues.

Contentions of the Respondent:

The Respondent submitted that Section 31 (Approval of Resolution Plan) of IBC is not applicable to the facts of the present case. Since the insolvency proceedings did not materialize, the rights of the Respondent did not extinguish. The rights of the Respondent are restored, since there was a failure of insolvency resolution process.

The Respondent further submitted that since the asset was sold on “as is where is basis”, the rights of the Respondent stood secured. They do not stand relinquished even if the distribution is done after following Section 53 (Distribution of assets) of IBC. The Respondent emphasized that since the asset was sold on an “as is where is basis”, ratio laid down in Paschimanchal Case, should not be applied to present case.

Observations of the Gujarat HC

Gujarat HC analyzed the facts of the case that CIRP was undertaken and claims were invited and the Respondent failed to substantiate it and at the stage of liquidation did not lodge its claim. Gujarat HC placing reliance on judgments pronounced by Supreme Court observed that the debt of the Respondent did not form part of the resolution plan and therefore stood extinguished.

Gujarat HC examined Sections 52 and 53 of IBC and asserted that the Respondent as an operational creditor would have to fall in line as per the “waterfall mechanism”.

Gujarat HC relied upon judgments pronounced in the matter of Ghanshayam Mishra and Sons Private Limited v. Edelweiss Asset Reconstruction Company Limited [(2021)/9/SCC/657] and Paschimanchal Case and reiterated that once having relinquished its interest under Section 52, the Respondent cannot continue the insistence of maintaining the charge in the revenue records and its claim will have to stand in priority.

Thereafter, Gujarat HC discussed that the dissenting argument of the Respondent, that since the asset was sold on “as is where is basis” and the charge of the Respondent was rightly recorded, is misconceived as the sale deed already records that the purchaser shall not be liable for payment of any outstanding dues of the government.

Gujarat HC also deduced Section 100 of TPA in a manner that a charge cannot be enforced against any person who has bought the property for consideration and has no notice of such charge.

Decision of the Gujarat HC

Gujarat HC held that the Petitioner was entitled to a ‘clean slate’. The Court set aside the order dated January 5, 2022, passed by the Respondent and mutated entry no. 6295 in the revenue records. It further directed the Talati-cum-Mantri to certify entry No. 4454 in the revenue records pursuant to the sale of land in question by registered sale deed dated December 17, 2021.

VA View:

The present judgment of Gujarat HC is a significant judicial pronouncement in the realm of insolvency law.

Gujarat HC has protected the rights of the purchaser of an asset in the liquidation process against claims that are not substantially proved during the CIRP and are not lodged with the liquidator at the time of liquidation process. This decision strengthens the enforcement mechanism of IBC. Gujarat HC has clarified the position of law that the purchaser of an asset under IBC is not liable to pay any dues to any government authority, since all dues, claims and debts will be dealt as per the “waterfall mechanism”. The government authorities cannot insist on the payment of dues, if the claim has not been lodged with the liquidator within the stipulated time. Gujarat HC also clarified the law under TPA that charge cannot be enforced against any person who has bought the property for consideration and has no notice of such charge.

For any query, please write to Mr. Bomi Daruwala at [email protected]