# SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS

- **Citation:** [2022] 12 S.C.R. 641
- **Court:** Supreme Court of India
- **Decided:** 2022-08-26
- **Case number:** Civil Appeal No. 7667 of 2021
- **Bench:** N. V. Ramana, J. K. Maheshwari, Hima Kohli
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/sundaresh-bhatt-liquidator-of-abg-shipyard-v-central-board-of-indirect-taxes-35468
- **Pages:** 26

## Headnote

Insolvency and Bankruptcy Code, 2016 - ss.14, 33(5), 53,
238 - Customs Act - Whether the provisions of the IBC would prevail
over the Customs Act and if so, to what extent - Held: The IBC
would prevail over the Customs Act to the extent that once moratorium
is imposed in terms of ss.14 or 33(5) of the IBC as the case may be,
the respondent authority only has a limited jurisdiction to assess/
determine the quantum of customs duty and other levies - The
respondent authority does not have the power to initiate recovery
of dues by means of sale/confiscation, as provided under the
Customs Act - After such assessment, the respondent authority has
to submit its claims (concerning customs dues/ /operational debt) in
terms of the procedure laid down, in strict compliance of the time
periods prescribed under the IBC, before the adjudicating authority
- In any case, the IRP/RP/liquidator can immediately secure goods
from the respondent authority to be dealt with appropriately, in terms
of the IBC - Interpretation of Statutes - Harmonious Construction.
Insolvency and Bankruptcy Code, 2016 - Corporate
Insolvency Process - Various stages involved in the corporate
insolvency process in India - Discussed.
Insolvency and Bankruptcy Code, 2016 - s.14 - Purpose of
the moratorium - Held: s.14 of the IBC prescribes a moratorium on
the initiation of Corporate Insolvency Resolution Process (CIRP)
proceedings and its effects - One of the purposes of the moratorium
is to keep the assets of the Corporate Debtor together during the
insolvency resolution process and to facilitate orderly completion
of the processes envisaged under the statute - Such measures ensure
the curtailing of parallel proceedings and reduce the possibility of
conflicting outcomes in the process - One of the motivations of
imposing a moratorium is for s.14(1)(a), (b), and (c) of the IBC to
 [2022] 12 S.C.R. 641
641
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[2022] 12 S.C.R.
form a shield that protects pecuniary attacks against the Corporate
Debtor - This is done in order to provide the Corporate Debtor
with breathing space, to allow it to continue as a going concern
and rehabilitate itself - Any contrary interpretation would crack
this shield and would have adverse consequences on the objective
sought to be achieved.
Words and Phrases - "Abandonment of Goods" - Discussed.
Collector of Customs v. Dytron (India) Ltd. 1999 ELT
342 Cal (39); S.V. Kondaskar v. V.M. Deshpande, AIR
1972 SC 878 : [1972] 2 SCR 965 (43); Gujarat Urja
Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209 (47)
- referred to.
Case Law Reference
[1972] 2 SCR 965
referred to
Para 43
(2021) 7 SCC 209
referred to
Para 47

## Text

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SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD
v.
CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS
(Civil Appeal No. 7667 of 2021)
AUGUST 26, 2022
[N. V. RAMANA, CJI, J. K. MAHESHWARI AND
HIMA KOHLI, JJ.]
Insolvency and Bankruptcy Code, 2016 - ss.14, 33(5), 53,
238 - Customs Act - Whether the provisions of the IBC would prevail
over the Customs Act and if so, to what extent - Held: The IBC
would prevail over the Customs Act to the extent that once moratorium
is imposed in terms of ss.14 or 33(5) of the IBC as the case may be,
the respondent authority only has a limited jurisdiction to assess/
determine the quantum of customs duty and other levies - The
respondent authority does not have the power to initiate recovery
of dues by means of sale/confiscation, as provided under the
Customs Act - After such assessment, the respondent authority has
to submit its claims (concerning customs dues/ /operational debt) in
terms of the procedure laid down, in strict compliance of the time
periods prescribed under the IBC, before the adjudicating authority
- In any case, the IRP/RP/liquidator can immediately secure goods
from the respondent authority to be dealt with appropriately, in terms
of the IBC - Interpretation of Statutes - Harmonious Construction.
Insolvency and Bankruptcy Code, 2016 - Corporate
Insolvency Process - Various stages involved in the corporate
insolvency process in India - Discussed.
Insolvency and Bankruptcy Code, 2016 - s.14 - Purpose of
the moratorium - Held: s.14 of the IBC prescribes a moratorium on
the initiation of Corporate Insolvency Resolution Process (CIRP)
proceedings and its effects - One of the purposes of the moratorium
is to keep the assets of the Corporate Debtor together during the
insolvency resolution process and to facilitate orderly completion
of the processes envisaged under the statute - Such measures ensure
the curtailing of parallel proceedings and reduce the possibility of
conflicting outcomes in the process - One of the motivations of
imposing a moratorium is for s.14(1)(a), (b), and (c) of the IBC to
 [2022] 12 S.C.R. 641
641
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SUPREME COURT REPORTS
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form a shield that protects pecuniary attacks against the Corporate
Debtor - This is done in order to provide the Corporate Debtor
with breathing space, to allow it to continue as a going concern
and rehabilitate itself - Any contrary interpretation would crack
this shield and would have adverse consequences on the objective
sought to be achieved.
Words and Phrases - "Abandonment of Goods" - Discussed.
Collector of Customs v. Dytron (India) Ltd. 1999 ELT
342 Cal (39); S.V. Kondaskar v. V.M. Deshpande, AIR
1972 SC 878 : [1972] 2 SCR 965 (43); Gujarat Urja
Vikas Nigam Ltd. v. Amit Gupta (2021) 7 SCC 209 (47)
- referred to.
Case Law Reference
[1972] 2 SCR 965
referred to
Para 43
(2021) 7 SCC 209
referred to
Para 47
CIVIL APPELLATE JURISDICTION : Civil Appeal No.7667
of 2021.
From the Judgment and Order dated 22.11.2021 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No.236 of 2021.
Tushar Mehta, SG, K.M. Nataraj, ASG, Dr. Abhishek Manu
Singhvi, Gaurav Mitra, Arvind Datar, Jay Savla, Mukul Rohatgi,
Siddhartha Dave, Vikram Nankani, Sr.Advs., Sameer Pandit, Aman Raj
Gandhi, Parthasarathy Bose, Anuj Jain, Aditya Ladha, Ananya Pratap
Singh, Azeem Samuel, Nidhiram, Akash Kakade, Gurdeep Singh Sachar,
Vikrant Shetty, Shriya Ray Chaudhary, Swetab Kumar, Somanatha
Padhan, Abhishek Sharma, Ms. Ashly Cherian, Gaurav Arora, Kamlendra
Singh, Ms. Renuka, Ms. Renuka Sahu, Alok Tripathi, Rupesh Kumar,
Kannu Agarwal, Mayank Pandey, Mukesh Kumar Maroria, Shiv Mangal
Sharma, Saurabh Rajpal, Ms. Shrinjan Khosla for M/S. Aura & Co.,
Jasdeep Singh Dhillon, Salil Thakore, Prabhay Chaurasia, Rahul Gupta,
Ms. R. Nair, Gaurav Mathur, Ms. Anushree Prashit Kapadia, Abhishek
Shah, Ms. Priyanka Rathi, Shashank Khurana, M/S. Cyril Amarchand
Mangaldas, Advs. for the appearing parties.
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The Judgment of the Court was delivered by
N. V. RAMANA, CJI
1. The present Civil Appeal under Section 62(1) of the Insolvency
and Bankruptcy Code, 2016 ("IBC") arises out of the impugned judgment
dated 22.11.2021 passed by the National Company Law Appellate
Tribunal, New Delhi ("NCLAT") in Company Appeal (AT) (Insolvency)
No. 236 of 2021. Vide the impugned judgment, the NCLAT has allowed
the appeal filed by the respondent against the order of the National
Company Law Tribunal, Ahmedabad ("NCLT") /Adjudicating Authority
whereby the Adjudicating Authority directed the release of certain goods
lying in the Customs Bonded Warehouses without payment of custom
duty and other levies.
2. A conspectus of the facts necessary for the disposal of the
present appeal is as follows: ABG Shipyard ("Corporate Debtor")
was in the business of shipbuilding prior to the initiation of corporate
insolvency proceedings against it. As a part of its business enterprise, it
used to regularly import various materials for the purpose of constructing
ships which were to be exported on completion. Some of these goods
were stored by the Corporate Debtor in Custom Bonded Warehouses in
Gujarat and Container Freight Stations in Maharashtra. Bills of entry for
warehousing were submitted at the relevant time. The Corporate Debtor
also took the benefit of an Export Promotion Capital Goods Scheme
("EPCG Scheme") and was granted a license under the said scheme
("EPCG License") with respect to the said warehoused goods.
3. On 01.08.2017, the National Company Law Tribunal,
Ahmedabad ("NCLT") passed an order commencing the Corporate
Insolvency Resolution Process ("CIRP") against the Corporate Debtor,
and the appellant was appointed as the Interim Resolution Professional.
In the same order, the NCLT also declared a moratorium under Section
13(1)(a) of the IBC.
4. On 21.08.2017, the appellant informed the respondent of the
initiation of CIRP and sought custody of the warehoused goods and
requested the respondent not to dispose of or auction the same. On
29.03.2019, the respondent for the first time, issued a notice to the
Corporate Debtor regarding non-fulfilment of export obligations in terms
of the EPCG license demanding customs duty of Rs. 17,13,989/- with
interest. From 02.04.2019 to 07.04.2019, the respondent issued five
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS
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different demand notices to the Corporate Debtor regarding nonfulfillment of export obligations under different EPCG licenses for various
amounts. The details of the demand notices issued by the Respondent
for non-fulfilment of EPCG License conditions by the Corporate Debtor
are tabulated herein for ease of reference:
S. NO.
DATE
DETAILS OF DEMAND NOTICE
DEMANDED AMOUNT (PLUS
INTEREST AS APPLICABLE)
1.
29.03.2019
EPCG License No. 5230007265 dated
16.07.2010
Rs. 17,13,989
2.
02.04.2019
EPCG License No. 5230008206 dated
16.11.2010
Rs. 96,20,325
3.
04.04.2019
EPCG License No. 5230007016 dated
17.05.2010
Rs. 53,29,072
4.
05.04.2019
EPCG License No. 5230007082 dated
03.06.2010
Rs. 2,05,73,402
5.
05.04.2019
EPCG License No. 5230006881 dated
31.03.2010
Rs. 6,64,646
6.
07.04.2019
EPCG License No. 5L32206936 dated
20.04.2010
Rs. 12,04,09,501
5. On 25.04.2019, the NCLT passed an order commencing
liquidation against the Corporate Debtor under Section 33(2) of the IBC.
Vide the said order, the NCLT declared that the earlier moratorium
imposed under Section 13(1)(a) of the IBC shall cease to have effect by
the operation of Section 14(4) of the IBC. However, a fresh direction
was passed under Section 33(5) of the IBC barring the institution of any
suit or legal proceeding by or against the Corporate Debtor. Further, the
NCLT also appointed the appellant as the liquidator vide the same order.
6. Thereafter, the respondent filed claims before the appellant for
goods warehoused in both Gujarat and Maharashtra on 20.05.2019,
27.05.2019 and 29.05.2019 under the IBC. On 27.06.2019, the appellant
informed the respondent through its officers that liquidation proceedings
had commenced against the Corporate Debtor and that the goods were
to be released to the appellant.
7. Due to inaction by the respondent, the appellant filed I.A. No.
474 of 2019 before the NCLT under Section 60(5) of the IBC seeking a
direction against the Respondent to release the warehoused goods
belonging to the Corporate Debtor on 01.07.2019.
8. At this juncture, for the first time on 11.07.2019, the respondent
issued a notice to the Corporate Debtor under Section 72(1) of the
Customs Act for custom dues amounting to Rs. 763,12,72,645/- on 2531
Bills of entries. The respondent filed a concurrent claim for the said
amount before the appellant under the IBC. Details of the amount claimed
by the respondent before the appellant are as follows:
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S. NO.
DATE
DETAILS OF CLAIMS FILED BY RESPONDENT
BEFORE APPELLANT UNDER FORM C
CLAIMED AMOUNT
(PLUS INTEREST AS
APPLICABLE)
1.
20.05.2019
Non-fulfilment of obligations under 11 EPCG
Licenses
Rs. 37,92,29,749
2.
27.05.2019
Non-fulfilment of obligations under 37 EPCG
Licenses
Rs. 151,33,06,859
3.
29.05.2019
Non
clearing
of imported
goods from
Jawaharlal Nehru Port Trust, Nhava Sheva,
Maharashtra
Rs. 22,70,50,898
4.
18.09.2019
Dues for all cargo in custom bounded
warehouses in Gujarat
Rs. 763,12,72,645
9. On 25.02.2020, the NCLT allowed I.A. No. 474 of 2019 filed
by the appellant and passed the following directions:
"14) Therefore, the present IA deserves to be allowed.
Accordingly, it is allowed in terms of its prayer clause as well as
with following directions.
i)
The Respondents are directed to allow the applicantliquidator to remove the Material, which is lying in the
Customs Bonded Warehouses without any condition,
demur and/ or payment of Customs Duty.
ii)
The Respondents are at liberty to lodge its claim with
the Applicant-Liquidator with regard to the Customs Duty
charges payable on the release of material, which form
part of the assets of the Corporate Debtor company (in
liquidation), before the Liquidator under the provisions
of Insolvency and Bankruptcy Code, 2016 and in
accordance with law.
iii)
The Customs Department shall allow removal of goods/
material within two weeks, from the date of receipt of
an authentic copy of this order from the Liquidator.
iv)
Meanwhile, the Respondents shall not proceed for
auctioning, selling or appropriating the Materials owned
by the Corporate Debtor company, for the purpose of
recovery of its Customs Duty, which may tantamount to
violation of the l&B Code and put the applicant/liquidator
of the Corporate Debtor company (under liquidation) in
disadvantageous position."
10. The NCLT considered Section 238 of the IBC and held that
the non-obstante clause in the IBC, being part of a subsequent law,
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
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shall have overriding effect on proceedings under the Customs Act.
Further, looking to the waterfall mechanism under Section 53 of the
IBC, the NCLT held that distribution of proceedings from sale of liquidation
of assets shall also prevail over the Customs Act provisions. The NCLT
held that, as Government dues, the claims by the respondent would have
to be dealt with in accordance with Section 53 of the IBC. Apart from
the above, the NCLT also placed reliance on a circular issued by the
Central Board of Excise and Custom, being Circular No. 1053/02/2017CX dated 10.03.2017 relating to Section 11E of the Central Excise Act,
1944. The abovementioned circular clarifies that dues under the Central
Excise Act would have first charge only after the dues under the
provisions of the IBC are recovered. As Section 142A of the Customs
Act is pari materia with Section 11E of the Central Excise Act,1944,
the NCLT applied the same rationale to interpret the said section in
holding that the provisions of the IBC have priority.
11. Subsequent to the above judgment, the appellant sold the goods
warehoused in Surat for a consideration of Rs. 169.11 crores. The sales
process with respect to the goods warehoused in Dahej, Gujarat is
currently ongoing, and is challenged before this Court in C.A. No. 7722
of 2021 and C.A. No. 7731 of 2021.
12. On 04.03.2021, the respondent filed an appeal before NCLAT
challenging the order dated 25.02.2020 passed by the NCLT. On
22.11.2021, the NCLAT passed the impugned order, whereby it allowed
the appeal filed by the respondent and set aside the directions of the
NCLT requiring the respondent to release the warehoused goods to the
possession of the appellant without seeking the custom dues. The NCLAT
rather directed that the warehoused goods can be "released or disposed
of as per Applicable Provisions of Customs Act by the Proper
Officer".
13. The NCLAT, in allowing the appeal of the respondent, held
that the goods lying in the customs bonded warehouse were not the
Corporate Debtor's assets as they were neither claimed by the Corporate
Debtor after their import, nor were the bills of entry cleared for some of
the said goods. By not filing the said bills of entry, the NCLAT held that
the importer, i.e., the Corporate Debtor, had relinquished his title to the
imported goods. The NCLAT held that the Corporate Debtor is deemed
to have lost his title to the imported goods by action of Sections 48 and
72 of the Customs Act. As such, the respondent is empowered to sell
the goods and recover the government dues.
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14. The NCLAT held that 'imported goods', which are subject to
levy of Customs, stand on a different footing as payment of customs
duty is a consequence of importing the goods rather than a liability on
the Corporate Debtor to pay it. The appellant cannot stand at a better
footing than the Corporate Debtor that he represents and cannot take
possession of assets which the Corporate Debtor itself could not have
obtained. Customs duty therefore needs to be paid for the release of the
warehoused goods.
15. The NCLAT held that the Customs Act is a complete Code
which provides that warehoused goods cannot be released until the import
duties are paid. Mere filing of claims under 'Form C' by the respondent
before the appellant cannot be taken to signify the relinquishment of the
right of the respondent over the warehoused goods.
16. On the issue of priority of IBC over the Customs Act, the
NCLAT held that the issue did not arise in the present case, as the goods
in question were imported prior in time to the initiation of the CIRP.
While the containers were imported between 2012 to 2015, the CIRP
was initiated only in 2017 and the Corporate Debtor went into liquidation
in 2019. By not paying the import duties, the Corporate Debtor had lost
the right to the warehoused goods prior to the initiation of the CIRP. The
NCLAT held that these warehoused goods stand on a different footing
and cannot be considered assets of the Corporate Debtor which were
subject to the IBC provisions.
17. Aggrieved by the above judgment passed by the NCLAT, the
appellant has filed the present Civil Appeal against the impugned judgment.
18. Mr. Arvind Datar, learned Senior Counsel appearing on behalf
of the appellant, submitted as follows:
i.
The Corporate Debtor is the owner of the goods. The learned
Senior Counsel referred to Section 48 of the Customs Act
and stated that it only applies to goods which are neither
cleared nor warehoused by the importer. This Section,
however, is not applicable to the present case as the notice
issued and Form C filed by the respondent are in relation to
warehoused goods. Thus, the notice issued by the
respondent under Section 72 of the Customs Act and the
consequent Form C does not in any manner attract Section
48 of the Customs Act.
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
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ii.
The Corporate Debtor has not lost ownership of the goods
as alleged by the respondent. The respondent, by issuing
notice under Section 72 of the Customs Act and filing its
claim with the liquidator, has admitted that the Corporate
Debtor is the owner. Neither Sections 72 nor 48 of the
Customs Act signifies any transfer to the respondent. The
Corporate Debtor has also never relinquished title to the
goods and no communication regarding the same has been
made to the respondent.
iii.
By submitting claims under Section 38 of the IBC, the
respondent has elected to subject its dues to be governed
by IBC, and more specifically, to the distribution matrix
provided Section 53 of the IBC. The claims made by the
respondent before the appellant are based solely on the
Corporate Debtor's ownership of the goods. The respondent
cannot blow hot and cold at the same time by again claiming
before this Court that the Corporate Debtor has lost
ownership of the said goods.
iv.
The respondent could not have exercised its right under the
Customs Act, as the statutory charge of the respondent
under Section 142A of the Customs Act is expressly
subordinate to the IBC.
v.
The respondent's custody of the Corporate Debtor's goods
is in violation of Sections 14 and 33 of the IBC. Section
14(1)(a) of the IBC expressly prohibits the institution or
continuation of proceedings against the Corporate Debtor
during the moratorium period. Further, Section 14(1)(c)
states that foreclosure, recovery, or enforcement of any
security interest against the Corporate Debtor is prohibited.
19. Mr. K.M. Nataraj, learned Additional Solicitor General of India
appearing for the respondent, submitted as under:
i.
The goods left in the Custom Bonded Warehouse are not
the assets of the Corporate Debtor. This is because these
goods were never claimed after being imported. As per the
record, the goods were imported between the years 2012
and 2015, and the Corporate Debtor started the liquidation
process in 2019. In this span of 4 years, the Corporate
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Debtor never cleared bills of entry for part of the goods
and abandoned all the material lying in the Custom Bonded
Warehouse. Despite receipt of various demand notices by
the respondent, the Corporate Debtor did not clear the goods
and hence the same are liable to be sold by the respondent
under the Customs Act.
ii.
The liquidator can take into his possession only the assets
of the Corporate Debtor as under Section 35(1)(b) of the
IBC. However, in the present case, the warehoused goods
cannot be termed as assets of the Corporate Debtor, until
and unless the same are legally cleared from the warehouses
upon payment of relevant dues and duties. The Corporate
Debtor herein has not even paid the bill of entry for part of
the goods.
iii.
Section 45 of the Customs Act lays down restrictions on
custody and removal of imported goods. It stipulates that
all imported goods unloaded in the customs area shall remain
in the custody of such person approved by the commissioner
till the time the same are cleared for home consumption or
are warehoused or transshipped. Further, it provides that if
such goods are not cleared as per the criteria mentioned
above, they can be sold after permission from the proper
officer. Section 71 of the Customs Act further states that
no goods shall be taken out of the warehouse except as
provided under by the Customs Act. Hence, the goods
cannot be removed without payment of import duties and
charges.
iv.
The Corporate Debtor has abandoned the imported goods
for several years, refused to pay the import duties and other
charges, and has not taken any effort to take possession of
the goods for several years. Consequently, the Corporate
Debtor has lost its right to the warehoused goods, and hence
under Section 72 of the Customs Act, the government
authorities are fully authorized to recover the dues. In such
a circumstance, where the Corporate Debtor's title to the
goods has been deemed to have been relinquished, the
liquidator does not have the authority to take possession of
them.
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
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v.
Customs duty is an incidence or consequence of import.
Even before the CIRP was initiated, the Corporate Debtor
could not have secured the possession of the warehoused
goods without paying the due charges. Hence, the liquidator,
who is representing the Corporate Debtor, cannot stand on
a better footing than the Corporate Debtor itself.
vi.
It is further submitted that merely because the respondent
had filed its claim before the liquidator, it cannot be said
that the respondent had relinquished its rights over the
warehoused goods. The claim was filed by the respondent
only to realize its dues, and hence cannot be viewed as a
relinquishment or abandonment of its rights.
20. In light of the arguments advanced and the documents
submitted before this Court, we are called upon to answer two important
questions which arise for our consideration:
a)
Whether the provisions of the IBC would prevail over the
Customs Act, and if so, to what extent?
b)
Whether the respondent could claim title over the goods
and issue notice to sell the goods in terms of the Customs
Act when the liquidation process has been initiated?
ANALYSIS
21. It must be noted that this question assumes significance as the
warehoused goods belonging to the Corporate Debtor which is under
liquidation, are sought to be sold by the Customs Authorities in lieu of
custom dues. The respondent has relied on certain provisions of the
Customs Act to assume such power. This has been vehemently opposed
by the appellant herein, who has argued that once the insolvency process
has been initiated against the Corporate Debtor, the IBC becomes squarely
applicable and overrides any other enactment giving priority to the charges
on the property.
22. The NCLAT has not directly answered this question of law.
Rather, it has entered into the facts of the case to distinguish the
applicability of the IBC as compared to the Customs Act. The NCLAT
held that the Corporate Debtor had abandoned the goods much before
the insolvency process was initiated, and thereby the title of the goods
had passed to the Customs Authority. The NCLAT held as under:
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"7.16 Thus, it is clear that NCLT and NCLAT cannot usurp the
legitimate jurisdiction of other Courts, Tribunals and fora when
the dispute does not arise solely from or relating to the Insolvency
of the Corporate Debtor. In the instant case, the Corporate Debtor
had abandoned the imported goods in the Customs warehouses
for several years and failed to pay the import duty and other charges
and had not taken any steps to take possession of those goods for
several years. Therefore the importer had lost his right to the
imported goods. Consequently, the Customs Authorities are fully
empowered under Section 72 of the Act to sell those goods to
recover the government dues. The Liquidator has no right to take
into possession over those goods for which the Corporate Debtor's
title is deemed relinquished by implication of law. Even before
initiating the Corporate Insolvency Resolution Process, the
Corporate Debtor Company could not have secured the possession
of the imported goods except by paying the customs duty. The
Resolution Professional/Liquidator, who virtually represents the
Company, cannot stand on a better footing than the Corporate
Debtor itself.
...
7.20 In the instant case, the Appellant has filed its Claim before
the Liquidator in response to the Notice issued by the Liquidator.
Given the law laid down by the Hon'ble Supreme Court in the
above-mentioned case, it is clear that by submission of Claim in
response to the Notice issued by the Liquidator, it can not be
presumed that the Appellant had relinquished its right over the
property and submitted to the jurisdiction of the Liquidator. The
Claim is filed in an effort to realise its dues. Still, it will not amount
to relinquishment of its right over the Warehoused goods under its
custody for which Appellant has every right to sell those goods
for the realisation of the Government goods.
...
7.23 We are not convinced with the argument advanced by the
Respondent because the goods imported by the Corporate Debtor
were imported much before the initiation of the Corporate
Insolvency Resolution Process, and the Corporate Debtor never
claimed them after import. Undisputedly the containers were
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imported between 2012 to 2015. The CIRP was initiated against
the Corporate Debtor in 2017, and the liquidation order was passed
on April 25 2019.
7.24 Therefore, the Corporate Debtor's assets because the
Corporate Debtor never made any effort for clearing the goods
by paying Customs Duty and other applicable charges before the
initiation of Liquidation proceeding after importing them.
Undisputedly the containers were imported between 2012 to 2015.
The CIRP was initiated against the Corporate Debtor in 2017,
and the liquidation order was passed in April 25, 2019. Therefore
the assets lying in the Customs bonded warehouses cannot be
considered assets of the Corporate Debtor. The Liquidator intends
to possess the uncleared goods from the customs warehouses
without upfront payment of Customs duty, which is against the
statutory provisions of the Customs Act, 1962. Therefore, the
imported goods subject to levy of Customs stand on a different
footing than the goods /assets, not in the Corporate Debtor's
possession. Therefore, the assets lying in the Customs bonded
warehouses cannot be considered assets of the Corporate Debtor.
23. In the above context, this Court is required to analyze whether
the NCLAT's treatment of the facts is correct or if a fresh look is required.
Before we enter into a detailed discussion and analysis of the case at
hand, it would be beneficial to analyze certain provisions of the Customs
Act which may be relevant to this case.
24. When goods are imported/exported from India, such goods
may be subjected to custom duty as indicated under Section 12 of the
Customs Act. There are many objectives behind such exaction - some
of it is to maintain trade balance, control imports and exports, protection
of domestic industry, prevention of smuggling, conservation and
augmentation of foreign exchange, and so on.
25. When goods are imported, it can be either for home consumption
or for transshipment. An importer can either choose to pay the duty and
utilize the goods immediately for domestic usage or execute a bond so
as to warehouse the said goods. Accordingly, an importer has to submit
a bill of entry either for home consumption or for warehousing in terms
of Section 46 of the Customs Act, in the prescribed format.
26. When a person chooses to warehouse the goods, he ought to
execute a bond in terms of Section 59 of the Customs Act. Such
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warehoused goods can subsequently be either cleared for home
consumption or can be exported.
27. Section 61 of the Customs Act mandates the time period
allowed for warehousing. For example, in the case of capital goods
intended for a 100% export-oriented undertaking, warehousing is permitted
till such goods are cleared from the warehouse. In case of goods not
intended for such export-oriented purpose, a time period of one year is
prescribed in terms of Section 61(1)(c) of the Customs Act. The provision
also provides for an extension which could be granted by the appropriate
authority, for a period of not more than one year. Under Section 61(2) of
the Customs Act, provision is made to charge interest on those goods
which are warehoused beyond the period granted.
28. Section 71 of the Customs Act provides that no warehoused
goods shall be taken out of the warehouse, except on clearance for
home consumption or export or for removal to another warehouse, or as
provided by the Act.
29. Section 72 of the Customs Act deals with the issue of when
the goods can be said to have been improperly removed from the
warehouse. As this provision is of some relevance to the present case, it
is extracted below:
"72. Goods improperly removed from warehouse, etc.-(1)
In any of the following cases, that is to say,-
(a) where any warehoused goods are removed from a warehouse
in contravention of section 71;
(b) where any warehoused goods have not been removed from a
warehouse at the expiration of the period during which such goods
are permitted under section 61 to remain in a warehouse;
* * * * *
(d) where any goods in respect of which a bond has been executed
under section 59 and which have not been cleared for home
consumption or export or are not duly accounted for to the
satisfaction of the proper officer, the proper officer may demand,
and the owner of such goods shall forthwith pay, the full amount
of duty chargeable on account of such goods together with interest,
fine and penalties payable in respect of such goods
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(2) If any owner fails to pay any amount demanded under subsection (1), the proper officer may, without prejudice to any other
remedy, cause to be detained and sold, after notice to the owner
(any transfer of the goods notwithstanding) such sufficient portion
of his goods, if any, in the warehouse, as the said officer may
deem fit."
From the aforesaid, it can be noted that when goods are
warehoused and the importer has not taken sufficient steps to take the
goods out for domestic consumption or for transshipment, within the
required time period, then the proper office has to take steps in terms of
Section 72(2) of the Customs Act. The aforesaid provision mandate that
it is only after the determination of dues by the proper officer that goods
may be sold, in the event that the demanded amount relating to custom
duty, interest, fines, and other penalties have not been paid. In that case
alone, after such determination, a sufficient portion of goods may be
sold.
30. In order to complete the discussion on the Customs Act, it
may be necessary to take note of Section 142A extracted below:
142A. Liability under Act to be first charge.-Notwithstanding
anything to the contrary contained in any Central Act or State
Act, any amount of duty, penalty, interest or any other sum payable
by an assessee or any other person under this Act, shall, save as
otherwise provided in section 529A of the Companies Act, 1956
(1 of 1956), the Recovery of Debts Due to Banks and the Financial
Institutions Act, 1993 (51 of 1993), and the Securitisation and
Reconstruction of Financial Assets and the Enforcement of
Security Interest Act, 2002 (54 of 2002) and the Insolvency and
Bankruptcy Code, 2016 (31 of 2016)be the first charge on the
property of the assessee or the person, as the case may be..
31. In the present case, the Corporate Debtor as part of its business
used to regularly import and warehoused goods in the custom bonded
warehouses from at least 2011. As has already been mentioned above,
the CIRP process commenced against the Corporate Debtor on 01.08.2017
by the order of the NCLT. It appears from the record that no notices
were issued by the respondent against the Corporate Debtor with respect
to the warehoused goods prior to initiation of the CIRP. In fact, all the
duty demand notices issued by the respondent were from March 2019
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onwards. It is in this context that it is necessary for us to ascertain
whether the IBC overrides the Customs Act or vice-versa.
32. Insolvency and Bankruptcy Code came into force in India
from 28.05.2016 to combine provisions relating to insolvency found across
different statutes into a single comprehensive instrument. Under the earlier
legal regime, different statutes were resulting in multiple parallel
proceedings, which inevitably resulted in uncertainty for the creditors
over their recovery. One of the objectives behind the enactment of the
IBC was to end the conflict between different statutes.
33. The purpose behind insolvency law has been captured in
Halsbury's Laws of England (para 8, vol. III, 4th edition) in the following
manner:
"A man has a perfect right, so long as he is solvent, to continue a
losing business; but the moment he becomes insolvent he does so
at the risk of his creditors. As soon as he finds that he cannot pay
loop in the pound, although he may nevertheless think that if he
goes on he may be able to retrieve his position, he ought to call
together his creditors, who will have to bear the loss in case his
calculations are wrong, and leave them to determine whether the
business shall be continued or not. Moreover, it is not enough to
consult only the largest creditors. There is no insolvency within
the meaning of this offence if a careful, prudent, and unhurried
realization of the assets would produce enough to pay loop in the
pound on the amount of liabilities."
34. It may be relevant to capture a brief outlook as to various
stages involved in the corporate insolvency process in India:
(i)
When a financial default occurs, either the borrower
(Corporate Debtor under Section 10 read with Section 11
of the IBC) or the lender (creditors - financial creditor
under Section 7 or operational creditor under Section 9 of
the IBC) can approach the NCLT for initiating the resolution
process. Operational creditors need to give a notice of 10
days to the Corporate Debtor before approaching the
NCLT. If the Corporate Debtor fails to repay dues to the
operational creditor, or fails to show any existing dispute or
arbitration, then the operational creditor can approach the
NCLT.
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(ii)
Upon admission of an application by the NCLT, the claims
of the creditor will be frozen for 180 days, during which
time, the NCLT will hear proposals for revival of the
Corporate Debtor and decide on future course of action.
During this period, a moratorium is imposed to ensure no
coercive proceedings are launched or continued against the
Corporate Debtor in any other forum or under any other
law, until approval of the resolution plan or initiation of the
liquidation process.
(iii)
The NCLT first appoints an interim insolvency professional.
The interim insolvency professional is to hold office until a
resolution professional is appointed. He further takes control
of the Corporate Debtor's operations and collects its
financial information from information utilities. The NCLT
must also ensure public announcement of the initiation of
corporate insolvency process and call for submission of
claims.
(iv)
The Corporate insolvency process must normally be
completed within 180 days of admission of the application
by the NCLT. The Committee of Creditors has to then take
decisions regarding insolvency resolution as provided by law.
35. In this context, we may note that when the insolvency process
commences, the adjudicating authority is mandated to declare a
moratorium on continuation or initiation of any coercive legal action against
the Corporate Debtor. Section 14 of the IBC reads as under:
14.Moratorium.--(1) Subject to provisions of sub-sections (2)
and (3), on the insolvency commencement date, the Adjudicating
Authority shall by order declare moratorium for prohibiting all of
the following, namely:-
(a) the institution of suits or continuation of pending suits or
proceedings against the corporate debtor including execution of
any judgment, decree or order in any court of law, tribunal,
arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing of by the
corporate debtor any of its assets or any legal right or beneficial
interest therein;
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(c) any action to foreclose, recover or enforce any security interest
created by the corporate debtor in respect of its property including
any action under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (54 of
2002);
(d) the recovery of any property by an owner or lessor where
such property is occupied by or in the possession of the corporate
debtor.
Explanation.-For the purposes of this sub-section, it is hereby
clarified that notwithstanding anything contained in any other law
for the time being in force, a license, permit, registration, quota,
concession, clearances or a similar grant or right given by the
Central Government, State Government, local authority, sectoral
regulator or any other authority constituted under any other law
for the time being in force, shall not be suspended or terminated
on the grounds of insolvency, subject to the condition that there is
no default in payment of current dues arising for the use or
continuation of the license, permit, registration, quota, concession,
clearances or a similar grant or right during the moratorium period;
(2) The supply of essential goods or services to the corporate
debtor as may be specified shall not be terminated or suspended
or interrupted during moratorium period.
(2A) Where the interim resolution professional or resolution
professional, as the case may be, considers the supply of goods or
services critical to protect and preserve the value of the corporate
debtor and manage the operations of such corporate debtor as a
going concern, then the supply of such goods or services shall not
be terminated, suspended or interrupted during the period of
moratorium, except where such corporate debtor has not paid
dues arising from such supply during the moratorium period or in
such circumstances as may be specified.
(3) The provisions of sub-section (1) shall not apply to -
(a) such transactions, agreements or other arrangements as may
be notified by the Central Government in consultation with any
financial sector regulator or any other authority;
(b) a surety in a contract of guarantee to a corporate debtor.
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(4) The order of moratorium shall have effect from the date of
such order till the completion of the corporate insolvency resolution
process:
Provided that where at any time during the corporate insolvency
resolution process period, if the Adjudicating Authority approves
the resolution plan under sub-section (1) of section 31 or passes
an order for liquidation of corporate debtor under section 33, the
moratorium shall cease to have effect from the date of such
approval or liquidation order, as the case may be.
36. Section 14 of the IBC prescribes a moratorium on the initiation
of CIRP proceedings and its effects. One of the purposes of the
moratorium is to keep the assets of the Corporate Debtor together during
the insolvency resolution process and to facilitate orderly completion of
the processes envisaged under the statute. Such measures ensure the
curtailing of parallel proceedings and reduce the possibility of conflicting
outcomes in the process.