Official Liquidator steps into the shoes of Director of the Company in liquidation to performing statutory functions

The issue that arose in the instant case was whether an “Official Liquidator” is a “dealer” within the meaning of section 2 (viii) of the Kerala General Sales Tax Act, 1963 (Act), and therefore would be required to collect sales tax in respect of the sales effected by him pursuant to winding up proceedings of a company in liquidation.

In the present matter a Company pursuant to BIFR’s recommendation was ordered to be wound up and an Official Liquidator was appointed to take charge of the assets and liabilities of the Company and to deal with the same as per the Companies Act, 1956. Official Liquidator issued notice inviting tenders for sale of assets of the company in liquidation.

The auction purchaser (relevant to present case) sent an offer for purchase expressly stating that the amount in question would be inclusive of all statutory levies, if any and as may be applicable. The said offer was accepted by the Official Liquidator and approved by the High Court. Subsequent to confirmation of sale, the auction purchaser, being desirous to transport the purchased assets across the border of multiple States requested the Official Liquidator to incorporate the relevant sales tax registration numbers in the sale invoices, which however was declined by the Official Liquidator. Subsequently, the Official Liquidator filed an affidavit before the High Court stating that the Official Liquidator would neither be collecting nor be paying any cess or sales tax in respect of the sale effected and accordingly the auction purchaser should be directed by the High Court to meet any expenses or liability towards payment of cess, sales tax, etc., if and when the same becomes payable.

It was held that the sale in question cannot be treated as a sale by the Central Government or by a registered dealer entitled to collect tax and further that the auction purchaser cannot be treated as a dealer under the Act and the said sale in question would not be exigible to sales tax.

In the appeal filed by auction purchaser against the above observation contending that the Official Liquidator would be bound to pay sales tax as and when a sale of the assets of the company in liquidation would be affected by him. The Division Bench observed that the “Official Liquidator” would not fall within the definition of “dealer” under the Act and accordingly the appeal was dismissed.

A review petition was thereafter filed against the above finding wherein a new plea was advanced by the auction purchaser claiming that even if the Official Liquidator did not fall within the definition of dealer under the Act, section 5A thereof would be attracted insofar as the auction purchaser is concerned. The High Court held that the Official Liquidator cannot be treated as a dealer under the Act and therefore it is not exigible for payment of sales tax. However, the Court was of the view that the auction purchaser is liable to pay purchase tax under section 5A of the Act.

To resist the claim of auction purchaser it was contended by the Official Liquidator that since an Official Liquidator is an officer of the Court, he merely discharges statutory functions imposed upon him and therefore cannot be held liable to pay tax under the Act. On the other hand the auction purchaser contended that the question of payment of purchase tax could not arise because firstly, the contention was raised for the first time in the review petition, and secondly, the said tax is a single point levy at the first point of sale. Further, the auction purchaser could not be made liable for a tax that was not even imposed or demanded by the competent authority and also that the Official Liquidator makes the sale on behalf of the Company and not as the owner.

The Apex Court while hearing the issue against the above impugned finding held that given the exceptionally wide scope of the definition, any person or entity that carries on any activity of selling goods, could be categorized as a “dealer” under the Act. A careful reading of the definition of “dealer” under the Act would make it evident that the legislature intended to provide for an inclusive criterion and broaden the ambit of the said classification. The legislature did not propose to restrict the scope of the term as perceived in common parlance. The definition of “dealer” under various sales tax legislations has been given a broad and inclusive interpretation which is in consonance with what the legislature intended with regard to imposing sales tax liability on all transactions of sale of goods. Therefore, the definition of a “dealer” under the Act would include persons, if they are involved in carrying on any business or trading activity, such as the sale of machinery as in the present case. Therefore, as a necessary sequitur, the Company in liquidation, whose assets are sold by way of an auction, would be a “dealer” under the Act.

Section 5 of the Act is the charging provision with regard to imposition of sales tax envisaging levy of tax on sale or purchase of goods by a dealer. In the instant case, the dealer under the Act would be liable to pay sales tax for the machinery sold at the point of first sale as the transaction in question would be exigible to tax under Section 5(1) of the Act.

The Official Liquidator, in generic terms, is an officer appointed to conduct the proceedings and to assist the Court in the winding up of a company. The powers of the liquidator are subject to control by the court and the same can be exercised by him alone and he cannot authorise any other person to exercise those powers.

It was held that an Official Liquidator- (i) derives its authority from the provisions of the Companies Act, 1956; (ii) acts on behalf of the company in liquidation for the purposes prescribed by the Act, 1956; (iii) is appointed by and is under the control and supervision of the Court while discharging his duties.

On the issue of liability of Official Liquidator under the Act, Rule 54 of the Rules, 1963 imposes liability on a receiver or manager or other person appointed by an order of the court, in the event that a business owned by a dealer, is under the control of the said receiver or manager or person, whatever be his designation, who in fact manages the business on behalf of the dealer. The aforesaid rule expressly provides that tax shall be levied upon and recoverable from such receiver, manager, etc., in the same manner, as it would be leviable upon and recoverable from the dealer. Such tax liability may be incurred by any person managing or conducting the business on behalf of the dealer. The tax liability incurred by such person will be equivalent to the liability which would be levied upon the dealer if he were conducting such business. Since the Official Liquidator is akin to an agent employed for the purpose of winding up of a company, he steps into the shoes of the Directors of the said Company for the purposes of discharging the statutory functions of an Official Liquidator. Thus, during the said proceedings, the Directors cease to exercise any functions from the date on which the Official Liquidator is appointed and all powers and functions for carrying on the business of the company thereafter vest with the official liquidator.
In the present case, the Official Liquidator had issued a notice inviting tenders for the sale of the assets of the Company. The offer of the auction purchaser was accepted and duly confirmed by the High Court. However, the dispute herein arose in respect to determination of which party would be exigible to sales tax.

The Official Liquidator was held to be an officer of the Court and that for the purpose of discharging statutory obligations imposed under the Act, 1956, the Official Liquidator merely steps into the shoes of the company in liquidation. By virtue of the notice issued by the Official Liquidator for inviting tenders it was held as amply evident that the liquidator intended to conduct a transfer of the said goods in liquidation. Since the conduct of an auctioned sale involved transfer of goods, it falls within the wide ambit of section 2(viii)(f) of the Act.

The Company in liquidation is a “dealer” with regard to the sale of its assets by way of an auction under a winding up order. An Official Liquidator steps into the shoes of the Director of the company in liquidation and performs his statutory functions in accordance with the directives of the Court. Furthermore, Rule 54 of the Rules, 1963 contemplates a situation where a business owned by a dealer, is under the control of a receiver or manager or any other person, irrespective of his designation, who manages the business on behalf of the said dealer. In the said scenario, the said person, in-charge of the business on behalf of the dealer, would be exigible to sales tax in the same manner as it would have been leviable upon and recoverable from the dealer itself.

Thus, the liability to pay sales tax, in the present case, would be on the Official Liquidator in the same manner as the dealer, that is, the Company in liquidation and not the auction purchaser. The offer of the auction purchaser, as accepted by the Official Liquidator and confirmed by the High Court, was inclusive of all taxes. It would have been the bounden duty of the Official Liquidator to have separated an amount for the payment of taxes under the Act, 1963 to avoid any liability.

[Assistant Commissioner, Ernakulam vs. Hindustan Urban Infrastructure Ltd. & Ors.]
(SC, 13.01.2015)