The limits of “As is Where is”: NCLAT reaffirms a seller’s duty of disclosure in auction sales
The expression ‘as is where is’ is a familiar feature of auction notices issued by Liquidators under the Insolvency and Bankruptcy Code, 2016 (“IBC”). It is generally understood to place the risk of inspecting and assessing the asset on the prospective purchaser. However, does accepting such a condition absolve a Liquidator of the responsibility to disclose known defects in the title of the property or furnish documents? The National Company Law Appellate Tribunal, Chennai Bench, in a common judgment in Pankaj Kumar and Anr. v. Praiseworth Infra (P) Ltd. (in Liquidation) Company Appeal (AT) (CH) (Ins) Nos. 462 & 463 of 2023, has answered this question in the negative.
The dispute arose from the auction of two immovable properties belonging to Corporate Debtor, Praiseworth Infra Private Limited, which was undergoing liquidation. The Liquidator conducted an e-auction in March 2020, pursuant to which the Appellants emerged as successful bidders for a vacant land and building, respectively. Pursuant thereto, the Appellants made payments towards the purchase consideration, including the earnest money deposit (“EMD”) and subsequent payments.
The legal due diligence by the Appellants revealed discrepancies in the title documents, variations between the extent of land reflected in the title deeds, revenue records and actual site measurements, and concerns that a portion of the marriage hall had been constructed on Government land. It was also discovered that certain parent title documents were unavailable or incomplete.
The purchasers/Appellants requested the Liquidator to furnish the necessary documents and clarify the discrepancies. However, the Liquidator insisted on payment of the outstanding sale consideration within the stipulated period, failing which the amounts deposited would be forfeited. Eventually, on 19 March 2021, the Liquidator forfeited the entire amount on account of non-payment of the balance consideration. The NCLT dismissed the purchasers’ applications challenging the forfeiture, leading to the appeals before the NCLAT.
The crux of the dispute was the applicability of Section 55 of the Transfer of Property Act, 1882 (“TPA”) to auction sales conducted by a Liquidator under the IBC. The Liquidator contended that the auction was expressly conducted on an ‘as is where is’ and ‘whatever there is’ basis, without warranties or indemnities, and that the purchasers/Appellant had accepted these conditions by participating in the auction. Consequently, according to the Liquidator, the purchasers/Appellant could not subsequently rely on deficiencies in the title to avoid their contractual obligation to complete the transaction.
The NCLAT, however, took a different view. It examined the obligations imposed on a seller under Section 55 of the TPA, particularly the duty to disclose material defects in the property or title, produce title documents in the seller’s possession or power when requested, and answer relevant questions concerning the property. The Tribunal held that these statutory obligations cannot simply be displaced by inserting a general disclaimer in the auction document.
Importantly, the Tribunal did not treat the IBC auction process as operating in isolation from the general law governing transfers of immovable property. It observed that neither the IBC nor the Liquidation Regulations prescribe an exhaustive set of terms and conditions governing every auction conducted by a Liquidator. Therefore, the terms of an auction document cannot be interpreted in a manner that overrides statutory obligations. The principles under Section 55 of the TPA would continue to apply to an auction of immovable property conducted under the IBC.
This reasoning signifies the distinction between a purchaser’s duty of due diligence and a seller’s duty of disclosure. While an auction purchaser is expected to independently examine the property and satisfy themselves before bidding, that responsibility does not entitle the Liquidator to withhold information already available with him. In the present case, the valuation reports obtained by the Liquidator himself had identified inconsistencies concerning the extent of the property, discrepancies in the title and revenue records, and possible encroachments. Despite having access to this information, the Liquidator failed to adequately disclose them in the auction process.
The Tribunal observed that permitting a Liquidator to rely exclusively on general disclaimer clauses would create information asymmetry between the seller and prospective bidders. Such an imbalance would not only prejudice bidders but could also undermine the very objective of a public auction.
In reaching its conclusion, the NCLAT distinguished its earlier decisions in Visisth Services Limited v. S.V. Ramani and Westcoast Infra Projects Pvt. Ltd. v. Ram Chandra Dallaram Choudhary. It clarified that those decisions dealt with materially different circumstances and did not involve the same allegations of suppression of material information and failure to comply with the obligations under Section 55 of the TPA. The Tribunal thus made it clear that the principle requiring successful bidders to honour their contractual commitments cannot be applied mechanically where the auction process itself suffers from material deficiencies attributable to the seller.
There was also an independent issue concerning the extent of the amount that could be forfeited. The auction advertisement provided for forfeiture of the amount paid in the event of default, whereas the undertaking executed by the purchasers specifically referred to forfeiture of the EMD. The Liquidator had proceeded to forfeit both the EMD and the subsequent payments. The NCLAT held that even assuming that forfeiture was otherwise permissible, it could extend only to the EMD and not to the additional amounts deposited after confirmation of the sale.
Setting aside the NCLT’s order, the NCLAT directed the Liquidator to refund the entire sum of INR 4,75,84,375 forfeited by him within six weeks. However, it declined to award interest at 18% per annum, noting that the purchasers had also failed to exercise the degree of due diligence expected of them before participating in the auction. The Liquidator was further directed to discharge the purchasers from any other liability arising from their failure to complete the transaction, including any disqualification from participating in future tenders.
The decision offers an important clarification on “as is where is” sale conditions. It cannot be used as a blanket protection against non-disclosure of material facts or non-compliance with statutory responsibility. Ultimately, the judgment reinforces a principle that is essential to the credibility of liquidation auctions – ‘the responsibility for due diligence may rest with the purchaser, but the responsibility for fair disclosure cannot be disclaimed by the seller’.
