Sundaresh Bhatt, Liquidator of Abg Shipyard v. Central Board of Indirect Taxes and Customs
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 Sche me
(“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. O n
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
different demand notices to the Corporate Debtor re garding non-
fulfillment 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 commenci ng
liquidation against the Corporate Debtor under Section 33(2) of the IBC.
Vide the said order, the NCLT declared that the earlier mora torium
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 dire ction
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 war ehoused 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:
645
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 allow ed.
Accordingly, it is allowed in terms of its prayer clause as well as
with following directions.
i) The Respondents are directed to allow the applicant-
liquidator 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
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
shall have overriding effect on proceedings under the Customs Act .
Further, looking to the waterfall mechanism under Section 53 of t he
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 iss ued by the
Central Board of Excise and Custom, being Circular No. 1053/02/2017-
CX 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 d ues under the
provisions of the IBC are recovered. As Section 142A of the Cust oms
Act is pari materia with Section 11E of the Central Excise Act,1944,
the NCLT applied the same rationale to interpret the said s ection 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, Guj arat 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 th e 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 t he 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.
647
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 coul d 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 t he 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 wer e
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
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
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 los t
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
649
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 ass ets
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]
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 docu ments
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 t o 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:
651
“7.16 Thus, it is clear that NCLT and NCLAT cannot usurp the
legitimate jurisdiction of other Courts, Tribunals and fora wh en
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 b efore
initiating the Corporate Insolvency Resolution Proc ess, 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 Cor porate
Insolvency Resolution Process, and the Corporate Debtor never
claimed them after import. Undisputedly the containers were
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
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 becau se 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 importin g 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 Deb tor’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 t he 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, cons ervation 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 Custom s Act. Such
653
warehoused goods can subsequently be either cleared for home
consumption or can be exported.
27. Section 61 of the Customs Act mandates the time perio d
allowed for warehousing. For example, in the case of capita l 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 g oods
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 f or
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 wh en
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
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
(2) If any owner fails to pay any amount demanded under sub-
section (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 m ay
deem fit.”
From the aforesaid, it can be noted that when goods are
warehoused and the importer has not taken sufficient steps to ta ke 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 m ay 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 Enforcem ent 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 b e..
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 not ices
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 2 019
655
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 cre ditors
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 unhur ried
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 borr ower
(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.
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
(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 i ts
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 t o 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, tri bunal,
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;
657
(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 corp orate
debtor as may be specified shall not be terminated or suspended
or interrupted during moratorium period.
(2A) Where the interim resolution professional or re solution
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 perio d 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 .
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
(4) The order of moratorium shall have effect from the dat e 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 pur poses 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. In this context, it is relevant to quote the
February 2020 Report of the Insolvency Law Committee, which notes
as under:
“8.2 The moratorium under Section 14 is intended to keep “the
corporate debtor’s assets together during the insolvency resolution
process and facilitating orderly completion of the p rocesses
envisaged during the insolvency resolution process and ensuring
that the company may continue as a going concern while the
creditors take a view on resolution of default.” Keep ing the
corporate debtor running as a going concern during the CIRP
helps in achieving resolution as a going concern as well, which is
likely to maximize value for all stakeholders. In other jurisdictions
too, a moratorium may be put in place on the advent of formal
insolvency proceedings, including liquidation and reorganization
proceedings. The UNCITRAL Guide notes that a moratorium is
critical during reorganization proceedings since it “facilitates the
continued operation of the business and allows the debtor a
breathing space to organize its affairs, time for prepara tion and
approval of a reorganization plan and for other steps such as
shedding unprofitable activities and onerous contracts, wh ere
appropriate.”
From the above, it can be seen that one of the motivations of
imposing a moratorium is for Section 14(1)(a), (b), and (c) of the IBC to
659
form a shield that protects pecuniary attacks against t he Corporate
Debtor. This is done in order to provide the Corporate Debtor wi th
breathing space, to allow it to continue as a going concern and rehabilitate
itself. Any contrary interpretation would crack this shield and w ould
have adverse consequences on the objective sought to be achieved.
37. Even if a company goes into liquidation, a moratorium continues
in terms of Section 33(5) of the IBC which reads as under:
33 (5) - Subject to section 52, when a liquidation order has been
passed, no suit or other legal proceeding shall be instituted by or
against the corporate debtor:
Provided that a suit or other legal proceeding may be instituted by
the liquidator, on behalf of the corporate debtor, with the p rior
approval of the Adjudicating Authority.
38. We may note that the IBC, being the more recent statute,
clearly overrides the Customs Act. This is clearly made out by a reading
of Section 142A of the Customs Act. The aforesaid provision notes that
the Custom Authorities would have first charge on the ass ets of an
assessee under the Customs Act, except with respect to cas es under
Section 529A of Companies Act 1956, Recovery of Debts Due to Banks
and Financial Institutions Act 1993, Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 and
the IBC, 2016. Accordingly, such an exception created under the Customs
Act is duly acknowledged under Section 238 of the I BC as well.
Additionally, we may note that Section 238 of the IBC clearly overrides
any provision of law which is inconsistent with the IBC. Section 238 of
IBC provides as under:
238. Provisions of this Code to override other laws-
The provisions of this Code shall have effect, notwithstanding
anything inconsistent therewith contained in any other law for the
time being in force or any instrument having effect by vir tue of
any such law.
39. The NCLAT, while playing down the effect of Section 142A
of the Customs Act and Section 238 of the IBC, has held that the Customs
Act is a complete code in itself and no person can seek re moval of
goods from the warehouse without paying customs duty. The NCLAT
relies on the judgment in Collector of Customs v. Dytron (India) Ltd.,
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
1999 ELT 342 Cal., by the High Court of Calcutta, which laid down that
customs duty carry first charge even during the insolvency process under
Section 529 and 530 of Companies Act, 1956. However, reliance on the
said precedent is not appropriate as the NCLAT has failed to notice that
such interpretation has been legislatively overruled by the inclusion of
Section 142A under the Customs Act, through Section 51 of the Finance
Act of 2011.
40. From the above, it is to be noted that the Customs Act and the
IBC act in their own spheres. In case of any conflict, the IBC overrides
the Customs Act. In present context, this Court has to ascerta in as to
whether there is a conflict in the operation of two differe nt statutes in
the given circumstances. As the first effort, this Court is m andated to
harmoniously read the two legislations, unless this Court finds a clear
conflict in its operation.
41. At the cost of repetition, we may note that the demand notices
issued by the respondent are plainly in the teeth of Section 14 of the IBC
as they were issued after the initiation of the CIR P proceedings.
Moratorium under Section 14 of the IBC was imposed when insolvency
proceedings were initiated on 01.08.2017. The first notice sent by the
respondent authority was on 29.03.2019. Further, when insolvency
resolution failed and the liquidation process began, the NCLT passed an
order on 25.04.2019 imposing moratorium under Section 33(5) of the
IBC. It is only after this order that the respondent issued a notice under
Section 72 of the Customs Act against the Corporate Debtor. The various
demand notices have therefore clearly been issued by the responde nt
after the initiation of the insolvency proceedings, with some notices issued
even after the liquidation moratorium was imposed.
42. We are of the clear opinion that the demand notices to s eek
enforcement of custom dues during the moratorium period would clearly
violate the provisions of Sections 14 or 33(5) of the IBC, as the case
may be. This is because the demand notices are an initiation of legal
proceedings against the Corporate Debtor. However, the above analysis
would not be complete unless this Court examines the extent of powers
which the respondent authority can exercise during the moratorium period
under the IBC.
43. In the above context, the judgment of this Cour t in
S.V .Kondaskar v. V .M. Deshpande, AIR 1972 SC 878, is extremely
661
relevant. In that case, this Court, while expounding the interplay of Section
446 of the Companies Act 1956 (bankruptcy provision) with the Income
Tax Act,1961, held as follows:
“7. …Looking at the legislative history and the scheme of the
Indian Companies Act, particularly the language of Section 446,
read as a whole, it appears to us that the expression “other legal
proceeding” in sub-section (1) and the expression “ legal
proceeding” in sub-section (2) convey the same sense and the
proceedings in both the sub-sections must be such a s can
appropriately be dealt with by the winding up court. The Income
Tax Act is, in our opinion, a complete code and it is particularly so
with respect to the assessment and re-assessment of income t ax
with which alone we are concerned in the present case. The fact
that after the amount of tax payable by an assessee has been
determined or quantified its realisation from a company in liquidation
is governed by the Act because the income tax payable also being
a debt has to rank pari passu with other debts due from the company
does not mean that the assessment proceedings for computing
the amount of tax must be held to be such other legal proceedings
as can only be started or continued with the leave of the liquidation
court under Section 446 of the Act. The liquidation court, in our
opinion, cannot perform the functions of Income Tax Officers
while assessing the amount of tax payable by the assessees even
if the assessee be the company which is being wound up by the
Court. The orders made by the Income Tax Officer in the course
of assessment or re-assessment proceedings are subject to appeal
to the higher hierarchy under the Income Tax Act. There are also
provisions for reference to the High Court and for appeals from
the decisions of the High Court to the Supreme Court and then
there are provisions for revision by the Commissioner of Income
Tax. It would lead to anomalous consequences if the winding up
court were to be held empowered to transfer the ass essment
proceedings to itself and assess the company to income tax. The
argument on behalf of the appellant by Shri Desai is that the winding
up court is empowered in its discretion to decline to transfer the
assessment proceedings in a given case but the power on the
plain language of Section 446 of the Act must be held to vest in
that court to be exercised only if considered expedient. We are
not impressed by this argument. The language of Section 446
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
must be so construed as to eliminate such startling consequences
as investing the winding up court with the powers of an Income
Tax Officer conferred on him by the Income Tax Act, because in
our view the legislature could not have intended such a result.
8. The argument that the proceedings for assessment o r re-
assessment of a company which is being wound up can only be
started or continued with the leave of the liquidation court is also,
on the scheme both of the Act and of the Income Tax Act,
unacceptable. We have not been shown any principle on which
the liquidation court should be vested with the power to stop
assessment proceedings for determining the amount of tax payable
by the company which is being wound up. The liquidation court
would have full power to scrutinise the claim of the revenue after
income tax has been determined and its payment demanded from
the liquidator. It would be open to the liquidation court then to
decide how far under the law the amount of income tax determined
by the Department should be accepted as a lawful liability on the
funds of the company in liquidation. At that stage the winding up
court can fully safeguard the interests of the company and i ts
creditors under the Act. Incidentally, it may be pointed out that at
the Bar no English decision was brought to our notice under which
the assessment proceedings were held to be controlled by t he
winding up court. On the view that we have taken, the decisions
in the case of Seth Spinning Mills Ltd., (In Liquidation) (1962)
46 ITR 193 (Punj) (Supra) and the Mysore Spun Silk Mills
Ltd., (In Liquidation) (1968) 68 ITR 295 (Mys) (supra) do not
seem to lay down the correct rule of law that the Income Ta x
Officers must obtain leave of the winding up court for commencing
or continuing assessment or re-assessment proceedings.”
44. Therefore, this Court held that the authorities can only take
steps to determine the tax, interest, fines or any penalty whi ch is due.
However, the authority cannot enforce a claim for recovery or l evy of
interest on the tax due during the period of moratorium. We are of the
opinion that the above ratio squarely applies to the interplay between
the IBC and the Customs Act in this context.
45. From the above discussion, we hold that the respondent could
only initiate assessment or re-assessment of the duties and other levies.
They cannot transgress such boundary and proceed to initiate recovery
663
in violation of Sections 14 or 33(5) of the IBC. The interim resolution
professional, resolution professional or the liquidator, as the ca se may
be, has an obligation to ensure that assessment is legal and he has been
provided with sufficient power to question any assessment, if he finds
the same to be excessive.
46. There is another aspect of this case that needs to be highlighted
to portray the inconsistency of the Customs Act vis-à-vis the IBC during
the moratorium period. In the present case, the demand not ice dated
11.07.2019 was issued by the respondent under Section 72 of the Customs
Act, in clear breach of the moratorium imposed under Section 33(5) of
the IBC. Issuing a notice under Section 72 of the Customs Act for non-
payment of customs duty falls squarely within the ambit o f initiating
legal proceedings against a Corporate Debtor. Even under the liquidation
process, the liquidator is given the responsibility to secure a ssets and
goods of the Corporate Debtor under Section 35(1)(b) of IBC.
47. As laid down earlier, the Customs Act and IBC can be read in
a harmonious manner wherein authorities under the Customs Act have
a limited jurisdiction to determine the quantum of operational debt – in
this case, the customs duty – in order to stake claim in terms of Section
53 of the IBC before the liquidator. However, the respondent does not
have the power to execute its claim beyond the ambit of Section 53 of
the IBC. Such harmonious construction would be in line with the ruling
in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209,
wherein a balance was struck by this Court between the jurisdiction of
the NCLT under the IBC and the potential encroachment on the legitimate
jurisdiction of other authorities.
48. However, it appears to us that in the impugned order, the
NCLAT has misinterpreted the aforesaid judgment of this Court in Gujrat
Urja Vikas Nigam Case (supra) and held as follows:
“7.16 Thus, it is clear that NCLT and NCLAT cannot usurp the
legitimate jurisdiction of other Courts, Tribunals and fora wh en
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
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
imported goods. Consequently, Customs Authorities are ful ly
empowered under Section 72 of the Act to sell those goods to
recover the Government dues. Liquidator has no right to take into
possession over those goods for which the Corporate Debtors
title is deemed relinquished by implication of law. Even b efore
initiating the Corporate Insolvency Resolution Proc ess, the
Corporate Debtor company could not have secured the possession
of the imported goods except by paying the Customs duty.
Resolution Professional/liquidator, who virtually represents the
company, cannot stand on a better footing than the Corporate
Debtor itself.”
49. Such interpretation clearly ignores the fact that there was no
“abandonment of goods” which would authorize the Customs Authorities
to initiate the adjudicatory process to transfer title to themselves. Before
any goods can be declared to have been “abandoned”, the same must
be adjudged by some authority after due notice. The position cannot be
assumed or deemed. In the case at hand, no such adjudication or notice
has been placed on record to suggest that such abandonment of the
warehoused goods had taken place prior to the impos ition of the
moratorium.
50. The NCLAT, by deciding the question of passing of title from
the Corporate Debtor to the respondent authority, has clearly ignored
the mandate of Section 72(2) of the Customs Act relating to sale. This
interpretation of the NCLAT clearly ignores the effects of the moratorium
under Sections 14 and 33(5) of the IBC. The fact is that the duty demand
notice and notice under Section 72(2) of the Customs Act, were issued
during the moratorium period, which has been completely ignore d by
NCLAT and has resulted in rendering the moratorium otiose.
51. The interpretation provided by the NCLAT, regarding the
deemed transfer of title of the goods from the assessee to the Customs
Authority under Section 72 of the Customs Act, would fly in the face of
Section 14 of the IBC, read with Sections 25 and 33(5). Moreover, such
deemed transfer cannot be countenanced in law as the same w ould be
in breach of Article 300A of the Constitution, as properties are deemed
to be transferred to the Customs Authority without there being adequate
hearing or any adjudication of any form. Such an interpretation cannot
be accepted by this court.
665
52. Interestingly, in the present case, on 20.05.2019, 27.05.2019,
29.05.2019 & 18.09.2019 the Customs Authorities filed Form C under
Regulation 17 of IBBI Liquidation Process Regulation 2016 before the
appellant/liquidator in order to stake claims for distribution of proceeds
of sale in consonance with Section 53 of the IBC. The resp ondent
authority, does a U-turn on filing such claims and instead, unilaterally
decides to initiate recovery proceedings under Section 72(2) o f the
Customs Act. Further, the Customs Authority bypasses even the notice
and adjudicatory requirements contemplated under Section 72(2) of the
Customs Act and takes the position that there is a deemed transfer of
title with respect to the assets as customs duty and other levies were not
duly paid. Such a change in stance is clearly an afterthoug ht, without
there being any basis in law to by-pass the speciali zed procedure laid
down under the IBC.
53. For the sake of clarity following questions, may be answered
as under:
a) Whether the provisions of the IBC would prevail over
the Customs Act, and if so, to what extent?
The IBC would prevail over The Customs Act, to the extent
that once moratorium is imposed in terms of Sections 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.
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?
answered in negative.
54. On the basis of the above discussions, following a re our
conclusions:
i) Once moratorium is imposed in terms of Sections 14 or
33(5) of the IBC as the case may be, the respondent
authority only has a limited jurisdiction to assess/determine
SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRAL
BOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]
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.
ii) After such assessment, the respondent authority has to
submit its claims (concerning customs dues/operational
debt) in terms of the procedure laid down, in stric t
compliance of the time periods prescribed under the IBC,
before the adjudicating authority.
iii) In any case, the IRP/RP/liquidator can immediately secure
goods from the respondent authority to be dealt wit h
appropriately, in terms of the IBC.
55. Resultantly, we allow the appeal and set aside the impugned
order and judgment of the NCLAT. There shall be no orders as to costs.
Divya Pandey Appeal allowed.
(Assisted by : Roopanshi Virang, LCRA)