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SC Clarifies the liability towards electricity dues in Auction Purchase

Contributed by: Khaitan & Co

The division bench of the Supreme Court comprising of Hon’ble Mr Justice Sanjay Kishan Kaul and Hon’ble Mr Justice K.M. Joseph passed the judgment dated 1 June 2020 in the matter of Telangana State Southern Power Distribution Company Limited & Anr. V M/s Srigdhaa Beverages, CA 1815 of 2020 laying down the law that an informed decision to buy an asset which has pending dues is an expressed acknowledgment of the liability to pay such dues.

M/s Srigdhaa (“Respondent”) purchased an unit through an auction sale (“auctioned plant”) which had failed to pay its dues and hence was auctioned by the secured creditor, Syndicate Bank (“Bank”) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (“SARFAESI Act”). The failure to repay the loan by the unit led to the auction by the Bank through an E-auction sale notice dated 25 May 2017. The request of the Respondent, to the Telangana State Southern Power Distribution Company Limited (“Appellant No 1”) seeking sanction of a 500 KVA connection required to run the bottling plant, was denied on the ground of pending electricity dues of the auctioned plant. Appellant No 1 moved a demand notice to recover Rs 50,47,715 (Rupees Fifty Lakhs Forty Seven Thousand Seven Hundred Fifteen) from the Respondent.

It is to be noted that vide the sale deed dated 29 September 2017, the auction sale was declared as free from all encumbrances known to the secured creditor, i.e. the Bank. The indemnity as provided to the Respondent was confined to the aspects of “any loss arising out any defect in the title, including recovery of statutory liabilities taxes, as also litigation expenses arising out of such defects in title”.

The question before the Hon’ble Supreme Court for consideration was whether the liability towards previous electricity dues of the last owner could be mulled on to the Respondent under Section 56 of the Electricity Act 2003?

It was observed by the court that as an auction purchaser, bidding in for “as is where is, whatever is and without recourse basis” as per Rules 8 & 9 of the Security Interest (Enforcement) Rules 2002 (“Rules”), it was the responsibility of the Respondent to inspect the premises and make detailed inquiries about the pending dues in every aspect. The Court held that wherein the pendency of dues is not mentioned in the terms and conditions of sale, the dues might not have been mulled on the subsequent owner.

The Court took notice of the distinction between a reconnection and first-time connection, as laid down in Special Officer, Commerce, North Eastern Electricity Supply Company of Orissa (NESCO) v. Raghunath Paper Mills Private Limited & Another (2012) 13 SCC 479, wherein it was held that since no application for transfer of a service connection was made, the respondents were free from the liability of paying electricity dues. It was observed that in view of the applicable regulations, the previous dues were to be cleared only in case of reconnection and not a connection being sought for the first time.

In the present case, it was observed that electricity dues being statutory in nature under the Electricity Act and as per the terms and conditions of the supply, cannot be waived and partake the character of dues of purely contractual nature. The Court emphasised on the fact that since the E-auction notice mentioned the dues (even if not quantified) as the liability of the auction purchaser, no otherwise plea is admissible. It was categorically held that the Appellant No 1 is well within its rights to demand for the dues from the Respondent as arrears due of the last owner.

The Supreme Court has reiterated the law as laid down previously in the cases of liability of the auction purchaser and has held the judgment in terms with ‘clear judicial thinking’. The E-auction notice was the key document in the present case, which was subject to the statutory dues and further clauses in the notice absolved the Authorised Officer carrying out the auction of any liability of any charges or dues, whatsoever.

Contributed by Khaitan & Co

The above article is authored by Mr. Ajay Bhargava (Partner), Ms. Abhisaar Bairagi (Principal Associate), Ms. Swati Jain (Associate). For any queries please contact:

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