OCTOBER 06, 2022

By Nidhi Agarwal, Associate & Anjali Hirawat, Partner, Lakshmikumaran & Sridharan

IN the case of Sundaresh Bhatt, The Liquidator of ABG Shipyard, the corporate debtor had warehoused the goods imported for use in shipbuilding. Since these goods were not removed from the warehouse even upon expiry of the warehousing period, the Customs Department initiated proceeding for recovery of customs duty on the warehoused goods. Parallelly, upon commencement of liquidation proceeding against the corporate debtor, the Customs Department also filed its claim under the Insolvency & Bankruptcy Code (Code).

The National Company Law Tribunal (NCLT) vide Order dated 25.02.2020 directed the Customs Department to allow the Liquidator to remove the goods from the warehouse without demand of customs duty and not to sell/auction the imported goods. On appeal by the Customs, the National Company Law Appellate Tribunal, Principal Bench, New Delhi (NCLAT) vide Order dated 22.11.2021 set aside the NCLT Order and held that the goods can be released or disposed of as per applicable provisions of the Customs Act, 1962 (Customs Act).

The NCLAT proceeded on the basis that:

- the corporate debtor has abandoned the warehoused goods as they have not taken any steps to take possession of the same;

- the corporate debtor is deemed to have relinquished their title to the goods under the provisions of Sections 23 & 68 of the Customs Act;

- the ownership in the goods vests with the Customs who are empowered under Section 72 of the Customs Act to sell the goods to recover their dues.

The Liquidator challenged the NCLAT Order before the Hon'ble Supreme Court. One of the core points before the Hon'ble Supreme Court was whether the NCLAT Order is in violation of the basic tenet of the Code. After a detailed analysis of the legal position, the Hon'ble Supreme Court vide Order dated 26.08.2022 - 2022-TIOLCORP-22-SC-IBC-LB concluded that:

- once a moratorium is imposed under the Code, the Customs authorities do not have the power to initiate recovery of dues by means of sale / confiscation;

- the Liquidator can secure the warehoused goods from the Customs and deal with the goods as provided under the Code.

Analysis of the Supreme Court decision:

The decision of the Hon'ble Supreme Court is based on a harmonious construction of both the legislations i.e., the Customs Act and the Code. The Hon'ble Court has observed that the provisions of the Customs Act are in consonance with the provisions of the Code. Section 238 of the Code which states that the provisions of the Code shall override other laws, is also supported by Section 142A of the Customs Act which provides that the Custom authorities have first charge on the assets of a defaulting-assessee except with respect to cases under the Code and certain other statutes.

Thus, once the insolvency process is initiated and moratorium is imposed under Sections 14 or 33(5) of the Code, the only recourse available to the Custom authorities is to stake their claim in terms of Section 53 of the Code. If they do not stake their claim, they will not receive a payout under the Code. Further, the Customs authorities will not have the power to initiate proceedings for recovery of their dues under the Customs Act. This position has also been echoed by the Hon'ble Supreme Court in the case of Ghanshyam Mishra & Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Limited - 2021-TIOLCORP-23-SC-IBC-LB.

Issuance of demand notices for recovery of customs dues [during the moratorium period] would clearly violate the provisions of Sections 14 and 33(5) of the Code, which provide for a bar on the institution or continuation of judicial proceedings for recovery against the corporate debtor during the moratorium period. In this regard, the Court relied upon the decision of S.V. Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, wherein while expounding the interplay of Section 446 of the Companies Act, 1956 (bankruptcy provision) with the Income Tax Act, 1961 it was held that the authorities can only take steps to determine the tax, interest, fines, or any penalty which is due and that the authorities cannot enforce a claim for recovery of the dues during the period of moratorium.

Further, with respect to the title of the warehoused goods, the Hon'ble Court held that there was no "abandonment of goods" which would authorize the Customs authorities to transfer the title to themselves. Before any goods can be declared as "abandoned", it must be adjudged so by the authorities after due notice. The position cannot be assumed or deemed, as the same would be in breach of Article 300A of the Constitution which states that no person can be deprived of their property except by authority of law, in certain specified circumstances. There is no abandonment of the title to the imported goods, automatically, unless this is exercised by the importer himself.

The Court explained that no such adjudication or notice has been placed on record to suggest that abandonment of the warehoused goods had taken place prior to the imposition of the moratorium. Therefore, institution of proceedings under Section 72(2) of the Customs Act, which provides for recovery of dues in case of improper removal of goods, after the imposition of moratorium is in violation of Sections 14 and 33(5) of the Code.

Further, by issuing the recovery notices under Section 72 of the Customs Act, the Customs authorities have accepted that the ownership of the warehoused goods vests with the corporate debtor. Therefore, in accordance with Section 36 of the Code, which states that the liquidation estate shall include any asset over which the corporate debtor has ownership rights irrespective of possession, the warehoused goods shall form a part of the liquidation estate and cannot be deemed to have been abandoned by the corporate debtor.

Impact of the Supreme Court decision:

Had the Hon'ble Supreme Court upheld the NCLAT Order, it would have had far reaching ramifications and set to naught the objective behind the Code i.e., to bring the insolvency law in India under a single unified umbrella with the object of speeding up of the insolvency process.

It would have resulted in a situation wherein the claim of Customs is given priority over the claim of all other creditors. This, in turn, would be in total violation of the waterfall mechanism stipulated under Section 53 of the Code, which provides for the order of distribution of the proceeds in liquidation and places the Government dues fifth in the order.

Further, Section 142A of the Customs Act which gives primacy to the provisions of the Code and Section 238 of the Code which makes it abundantly clear that the provisions of the Code will have an overriding effect, would have been rendered redundant.

Thus, it would be befitting to say that the decision of the Hon'ble Supreme Court has maintained the sanctity of the Code, by holding that the Customs authorities cannot initiate proceedings for recovery of their dues during the moratorium period and that the dues of the Customs authorities would also be subject to the Code.

[The views expressed are strictly personal.]