Sarfaesi Act: Statutory Dues Can’t Be Waived Off Contractually, Says Supreme Court

In an important order, the Supreme Court has held that statutory dues under the Electricity Act cannot be characterised as purely contractual and waived off under an auction of a distressed asset under the Sarfaesi Act.

The case relates to the auction of a water bottling plant in Hyderabad by Syndicate Bank after the owner failed to repay a loan. Consequently, the bank conducted an auction of the property on an ‘as is, where is, whatever there is and without recourse basis’.

After emerging as the highest bidder, the auction purchaser sought reinstatement of electricity supply on the site. The Telangana State Southern Power Distribution Company, however, denied the sanction and made demands from the auction purchaser and asserted its right to recover the dues in accordance with the terms and conditions of Telangana’s electricity supply regulations.

The power utility moved the Supreme Court after the Telangana High Court directed it to sanction the supply without insisting on past dues from the auction purchaser.

A bench comprising Justice Sanjay Kishan Kaul and Justice KM Joseph set aside the high court’s order and allowed the power utility to make a demand for past arrears from the auction purchaser.

Supreme Court Denies Relief

After being denied an electricity connection, the auction purchaser moved the high court, arguing that since it was a subsequent purchaser, it was not liable for dues of the past owner towards the power utility.

Further, relying on a past decision of the Supreme Court, it argued that liability to pay dues is created only against a consumer as defined in the Electricity Act. As the auction purchaser was not a consumer when seeking a new connection, no demand for past dues would arise, it said.

The Supreme Court dismissed the auction purchaser’s argument and said that:

• The auction purchaser was made aware about the past liabilities as there was a specific quantification of dues, including electricity dues in the auction notice.
• Different high courts have given varying judgments on liability of past dues under the Electricity Act.
• Dues having a statutory character cannot be waived off. Similarly, they cannot be classified as dues of purely contractual nature.
• Liability to pay past dues will fall on the purchaser if auction is conducted on an as is, where is, whatever there is and without recourse basis.

‘Bidders Must Ring-fence Liability’

Experts said the order will act as a guideline for purchasers who intend to buy distressed assets through auctions as past liabilities can affect their bidding strategies.

DSK Legal’s Anjan Dasgupta explained the process of auctions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and the degree of caution that prospective auction purchasers must take.

“Auctions under Sarfaesi Act are generally conducted on an ‘as is where is’, ‘as is what is’, ‘whatever there is’, and ‘no recourse’ basis. In such cases the auction notice clearly states that the statutory dues have to be borne by the auction purchaser,” Dasgupta said.

A purchaser under an auction will need to ascertain the exact amount of statutory dues, including unpaid electricity dues and based on the terms of the auction process, it will have to factor this unpaid amount in the purchase consideration being offered, he said.

Prachi Goel, partner at S&R Associates, explained the impact of the order in cases where an auction notice is silent about past liabilities. Ring-fencing can be achieved by insisting that liability in respect of all the relevant statutory dues that may have accrued until an agreed cut-off date must be to the account of the transferor, she said.

Auction purchasers can make it a condition precedent for closing of the sale process that the transferor must produce an evidence of payment to the relevant third parties or authorities, either in form of a no-dues certificate or any other document, she said.