How to Check for Statutory Dues Before Bidding in an IBC Liquidation Auction
A liquidation auction looks like a discount and is sometimes a liability. The asset is sold on an as is where is basis, which puts the burden of enquiry on the bidder, and statutory dues that sit on the property as a charge are not swept away by the sale. A buyer who has not quantified them before bidding has not valued the asset. This guide sets out the enquiry to make, in the order to make it.
The exercise is not long. It is usually a week of searches and two letters, against a purchase that can be spoiled by a demand arriving months later.
Step 1: Establish Exactly What Is Being Sold, and Under What Power
Read the auction notice and the process document before the valuation. Identify the corporate debtor, the date liquidation commenced, the specific asset or block of assets on offer, and whether the sale is of the asset alone or of the company as a going concern. The answer changes what travels with the purchase.
Confirm the basis of sale. Sales under the Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016 are ordinarily conducted on an as is where is footing. Where those words appear, the risk of undisclosed encumbrances and statutory dues has been allocated to you, and the rest of this exercise is how you discharge it.
Step 2: Obtain the Municipal Tax Position in Writing
Property tax is the most common charge and the easiest to check. Apply to the municipal corporation or council for a statement of dues for the property, by property identification number and by address, covering every year that could still be open rather than only the current year.
Ask for the arrears figure, the period it covers, any interest or penalty component, and whether any part is under dispute or appeal. Keep the reply. A figure from the municipal record is worth a great deal more at the pricing stage than an assurance from anyone in the process.
Step 3: Identify Every Statute That Could Create a First Charge
Property tax is an example, not the category. Work out which enactments could fasten a charge on this particular asset in this particular State, and read the charging words rather than a summary of them.
Section 212 of the Mumbai Municipal Corporation Act, 1888 illustrates the shape to look for. Property taxes due under that Act are a first charge upon the building or land in respect of which the tax is levied, and upon the goods and chattels found within or upon it belonging to the person liable, subject only to the prior payment of land revenue due to the Government. Two things follow from wording of that kind. The charge runs with the property rather than with the former owner, so a transfer does not shake it off. And the only competing claim it yields to is the one the section names.
Other enactments rank differently, and some create no charge at all. The answer is always in the text of the provision relied on, so find it and read it before you assume the position.
Step 4: Read the Waterfall to See What the Charge Holder Will Not Recover
Section 53 of the Insolvency and Bankruptcy Code, 2016 governs distribution in liquidation. Resolution process costs and liquidation costs are paid first. Workmen's dues for the twenty four months preceding liquidation rank equally with secured creditors who have relinquished their security. Other employees' dues for the preceding twelve months come next, then unsecured financial debts, and only then, under clause (e), do government dues for the preceding two years rank, together with any amount left unpaid to a secured creditor after it has enforced its security.
The significance for a bidder is the shortfall. A charge holder who ranks that low in the distribution will very often recover little from it, and the existence of a claim in the liquidation therefore tells you nothing about whether the charge has been satisfied. Clause (e) itself assumes that a secured creditor may enforce its security and come back for the balance, which means the security is still there.
Step 5: Do Not Build the Bid on Section 32A
Section 32A of the Code is frequently misread as a clean slate for a purchaser. It is not. Sub-section (1) causes the liability of the corporate debtor for an offence committed before the commencement of the process to cease where the resolution results in a change of management to a person who was not a promoter or related party and against whom no allegation of abetment is made. Sub-section (2) protects the property of the corporate debtor from attachment, seizure, retention or confiscation in proceedings in relation to such an offence.
Both limbs are about offences. An ordinary statutory due, such as unpaid property tax, is not an offence, and the section does not reach it. Treat Section 32A as protection against prosecution and against action taken in connection with a prior offence, and nothing more.
Step 6: Put Specific Written Queries to the Liquidator
Send one letter, before the bid, asking closed questions. Which statutory dues affecting the asset are known to the liquidator, in what amounts and for what periods. Which creditors have filed claims asserting a charge over the asset. Whether any secured creditor has relinquished its security, and where that is recorded. Whether any demand has been received from a municipal or other authority in respect of the asset.
Do not expect the replies to transfer the risk, because the sale terms will not let them. What they do is fix what was disclosed and when, which is the difference between a commercial disappointment and an arguable case later.
Step 7: Price the Dues In, and Get the Approval on That Basis
Add the quantified dues, and a reasonable provision for what the searches could not settle, to the bid price and treat the total as the cost of acquisition. Where the internal approval is a board or committee resolution, make the resolution refer to that total rather than to the bid alone, so that nobody is later authorising a number that was never the real one.
If the arrears cannot be quantified within the auction timetable, the honest options are to bid lower to absorb the uncertainty or not to bid. Bidding on the assumption that the charge will disappear on transfer is not one of them.
Common Pitfalls to Avoid
Treating a filed claim as a satisfied claim: A charge holder that proves in the liquidation has not given up its charge. Ask instead whether it has relinquished security, and find the answer in the record.
Reading as is where is as a formality: It is the operative allocation of risk in the sale. Where it appears, the enquiry is yours and the consequences of not making it are yours.
Checking only the current year's tax: Arrears accumulate across the years before liquidation, which is precisely the period a purchaser is exposed to. Ask for the full open position.
Relying on Section 32A against a tax demand: The section addresses offences. It is the wrong provision to cite against an ordinary statutory due, and citing it wastes the only hearing you may get.
Leaving the enquiry until after the sale is confirmed: Every argument available afterwards is weaker and more expensive than a search made before the bid.
Key Statutory Provisions
Section 53 of the Insolvency and Bankruptcy Code, 2016: Distribution of assets in liquidation, with resolution process and liquidation costs first, workmen's dues for the preceding twenty four months ranking equally with secured creditors who have relinquished security, other employees' dues for the preceding twelve months, unsecured financial debts, and then under clause (e) government dues for the preceding two years together with any amount unpaid to a secured creditor after enforcement of its security.
Section 32A of the Insolvency and Bankruptcy Code, 2016: Liability of the corporate debtor for an offence committed before the commencement of the process ceases on approval of a resolution plan involving a change of management to an unconnected person, and the property of the corporate debtor is protected from attachment, seizure, retention or confiscation in proceedings relating to such an offence. It does not address ordinary statutory dues.
Section 212 of the Mumbai Municipal Corporation Act, 1888: Property taxes due under the Act are a first charge upon the building or land in respect of which the tax is levied and upon the goods and chattels found within or upon it belonging to the person liable, subject to the prior payment of land revenue due to the Government. Cited as an example of the wording to look for; other States and other taxes differ.
Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016: The framework governing sale of assets by the liquidator, under which auctions are ordinarily conducted on an as is where is basis.
Sources and References
Section 53 of the Insolvency and Bankruptcy Code, 2016: Distribution of assets
Section 32A of the Insolvency and Bankruptcy Code, 2016: Liability for prior offences
Insolvency and Bankruptcy Code, 2016, Sections 32A and 53; Mumbai Municipal Corporation Act, 1888, Section 212
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers should consult a qualified legal professional for advice specific to their circumstances.
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