SUPREME COURT REITERATES THE MEANING OF “AS IS WHERE IS BASIS” IN A PROPERTY SALE

A Three Judge Bench of the Supreme Court comprising of the Chief Justice of India (CJI), Dr Dhananjaya Y Chandrachud, Justice Hima Kohli and Justice Pamidighantam Sri Narasimha passed a Judgment dated 19-05-2023 in the matter of K C Ninan vs Kerala State Electricity Board & Ors. Civil Appeal No 2109-2110 of 2004 along with a batch of other connected Appeals and reiterated the meaning of the expression “as is where is basis” in respect of sale of property in an auction.

Facts

i) In the present case, certain properties belonging to companies that were undergoing winding up / liquidation proceedings under the Sick Industrial Companies (Special Provision) Act 1985 (SICA), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and other relevant laws, were sold in auction to the Appellants-Auction Purchasers.

ii) Thereafter, when the Appellants applied for new electricity connections for the premises, the Respondents- Electricity Boards of the States of Kerala, Maharashtra, Gujarat, Assam, and West Bengal, refused to provide electricity connections unless the Auction Purchasers paid the electricity bill dues that the previous owners owed to the Respondents. The said refusal was done by virtue of the relevant provisions of the respective State Electricity Boards’ Conditions of Supply of Electrical Energy, which stipulated that reconnection or a new connection would not be given to any premises unless the arrears due to the Board are cleared.

iii) Aggrieved, the Appellants-Auction Purchasers challenged the State Electricity Boards’ Conditions of Supply of Electrical Energy before the respective High Courts. The High Courts in various Orders directed the Auction Purchasers to pay the electricity bill dues, on the ground that as per the e-auction notices, the premises were sold on “AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE BASIS” and hence, the Auction Purchasers would be liable to pay such dues.

Supreme Court Observations

Aggrieved, the Appellants-Auction Purchasers filed the aforementioned batch of Civil Appeals before the Hon’ble Supreme Court. The Apex Court passed a Judgment dated 19-05-2023 and observed as follows:

1) That as per Section 43 of the Electricity Act 2003 (2003 Act) (Duty to supply on request), although the electricity distribution licensee has the duty to supply electricity to the applicant on request, but the applicant has to ensure that all the statutory conditions laid down in the 2003 Act are fulfilled and the necessary charges and levies payable to the appropriate Authority for supply of electricity are complied with.

2) Further, Section 56 of the 2003 Act (Disconnection of supply in default of payment) provides that the consumer is liable to pay electricity charges, failing which, the electricity would be disconnected.

3) Furthermore, as per the Kerala Conditions of Supply of Electrical Energy that came into force on 01-01-1990, Clause 15 (c) stipulates that upon transfer of ownership of premises to a new owner, the latter has to intimate the Kerala State Electricity Board (KSEB) about the same and upon such intimation, the service would be disconnected. Thereafter, the new registered owner would have to pay off the dues to KSEB and apply for transfer of ownership of service connection. Similar provisions were found in the laws of the States of Maharashtra and Assam.

4) Thus, it is established from the overall scheme of the 2003 Act and the State Government’s Conditions of Supply of Electrical Energy, that only a consumer would be held liable for default in payment of electricity dues or charges.

5) Further, the supply of electricity is considered with respect to the consumer and not the premises, under Section 2 (15) of the 2003 Act (‘Consumer’). Hence, an auction-purchaser / consumer has to apply afresh for electricity connection in respect of the premises for which electricity connection was earlier provided to the previous owner. In such case, application made by the auction-purchaser would constitute fresh connection, even though the premises are the same.

6) Furthermore, the State Electricity Regulatory Commission (Commission) is empowered under Section 50 of the 2003 Act (The Electricity supply code) to specify an electricity supply code to provide for recovery of electricity charges, disconnection of supply of electricity for non-payment thereof, etc. Similarly, the Bench observed that the State Commission is also empowered to stipulate conditions for recovery of electricity arrears of previous owners from new / subsequent owners, in the Electricity Supply Code, as it is necessary (i) to recover the costs incurred for laying down the infrastructure, (ii) to safeguard the financial interests of the distribution licensees, etc, as provided in the Electricity Supply Codes of the aforementioned States.

7) Hence, in the present case, the terms stipulated in the Electricity Boards’ Conditions of Supply of Electrical Energy of the States of Kerala, Maharashtra and Assam, with regard to liability of new owner to pay electricity dues of a previous owner, as a condition for the grant of an electricity connection, was held to be justified, as it has a clear nexus with the scheme and objectives of the 2003 Act.

8) Furthermore, the premises, in the present batch of cases, were sold in auction sales on an ‘AS IS WHERE IS BASIS’.

9) That the implication of the expression(s) ‘AS IS WHERE IS BASIS’ / ‘AS IS WHAT IS BASIS’ / ‘AS IS WHERE IS, WHATEVER THERE IS AND WITHOUT RECOURSE BASIS’ is as follows:

(i) “every intending bidder is put on notice that the seller does not undertake any responsibility to procure permission in respect of the property offered for sale or any liability for the payment of dues, like water/service charges, electricity dues for power connection and taxes of the local authorities, among others”.

(ii) “a sale on “as is where is basis” postulates that the purchaser would be acquiring the asset with all its existing rights, obligations and liabilities. When a property is sold on an “as is where is” basis, encumbrances on the property stand transferred to the purchaser upon the sale.

10) Further, in auction sales, an auction purchaser is expected to exercise due diligence with regard to the condition of the premises, terms of sale, existence or lack of amenities, title, encumbrances, pending statutory dues, etc in respect of the property they propose to purchase. They are even allowed inspection of the premises before giving their bid and during such inspection, they have the opportunity to ascertain the said conditions and only upon having reasonable knowledge about the aforesaid conditions, the auction purchaser participates in the auction and offers a bid.

11) Hence, in the present batch of cases concerning the States of Kerala, Maharashtra and Assam, the Appellants-Auction Purchasers, during their inspection of the premises before submitting the bid, were duty bound to exercise due diligence and gather information regarding the disconnection of power due to outstanding bills. Hence, it is implausible for the Appellants to assert that they were oblivious of the existence of outstanding electricity dues.

12) However, as per Gujarat Electricity Supply Code, there was no provision prior to 2001, which required the new owner to clear past bills, so to that extent, the Apex Court held that the Auction Purchaser would not be liable to pay the pending electricity bills.

13) Further, as per the West Bengal laws, after the electricity was disconnected owing to non-payment of dues by previous owner, the subsequent owner and the Board did not enter into any agreement regarding payment of past bills, so to that extent, the Bench held the subsequent owner / Auction Purchaser would not be considered as a ‘Consumer’ unless there is an agreement with the distribution licensee. Therefore, they would not be liable for paying the past pending bills to the Board.

Thus, based on the aforesaid observations, the Supreme Court held that in the Civil Appeals concerning the States of Kerala, Maharashtra and Assam, (i) as the premises were sold on an ‘AS IS WHERE IS AND WHATEVER THERE IS’ basis to the Appellants-Auction Purchasers, (ii) and prior to bidding, they ought to have gathered information about the liability for the past arrears of electricity of the premises, (iii) therefore, the Respondents are well within their right to demand the electricity bill dues from the Appellants. As a result, the High Court Orders, that made the aforesaid observations, were allowed. However, considering the lapse of more than two decades in litigating the aforesaid disputes, the Apex Court directed the Respondents to waive the outstanding interest accrued on the principal dues from the date of application for supply of electricity made by the Auction Purchasers.

Whereas, in other States such as Gujarat and West Bengal, as there was no provision to that effect, the Appellants-Auction Purchasers were held not liable to pay the outstanding electricity bills owed by previous owners. As a result, the High Court Orders, that made the aforesaid observations, were allowed.

Harini Daliparthy

Senior Associate

The Indian Lawyer