DISPOSAL OF UNCLEARED GOODS - CUSTOMS ACT, 1962 vis-à-vis INSOLVENCY AND BANKRUPTCY CODE, 2016

[Mr. M. GOVINDARAJAN]

Clearance of goods

Chapter VII of Customs Act, 1962 (‘Act’ for short) provides the provisions for clearance of imported goods and export goods.  This Chapter is not applicable to baggage and postal articles.   The importer of any goods, other than goods intended for transit or transshipment, shall make entry thereof by presenting electronically on the customs automated system to the proper officer a bill of entry for home consumption or warehousing.  A bill of entry shall include all the goods mentioned in the bill of lading or other receipt given by the carrier to the consignor.  The importer shall present the bill of entry before the end of the next day following the day (excluding holidays) on which the aircraft or vessel or vehicle carrying the goods arrives at a customs station at which such goods are to be cleared for home consumption or warehousing,

Disposal of uncleared goods

Section 48 of the Act provides that if any goods brought into India from a place outside India are not cleared for home consumption or warehoused or transshipped within 30 days from the date of the unloading thereof at a customs station or within such further time as the proper officer may allow or if the title to any imported goods is relinquished, such goods may, after notice to the importer and with the permission of the proper officer be sold by the person having the custody thereof. 

Insolvency process

Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for initiation of corporate insolvency resolution process by a financial creditor/operational creditor/corporate debtor before the Adjudicating Authority against the corporate debtor.  The Adjudicating Authority, on verification the application and if it is satisfied that all the requirements are complied with, will allow the application.  The Adjudicating Authority then appoints an interim resolution professional and also declared moratorium.

Sale of uncleared goods during moratorium

Once moratorium is declared by the Adjudicating Authority no proceedings cannot be taken against the corporate debtor.  The proceedings under Customs Act are not exception to this.  Since section 238 of the Code provides that the provisions of the Code overrides the provisions of existing law.  Therefore the Customs Authority cannot initiate sale proceedings once moratorium is declared under the Code.

In COMMISSIONER OF CUSTOMS, (PREVENTIVE) WEST BENGAL VERSUS RAM SWARUP INDUSTRIES LTD. & ORS. [2019 (12) TMI 52 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL NEW DELHI] Ram Swarup Industries Limited (1^st respondent) had imported two consignments of machineries from Italy by claiming benefit of EPCG scheme under FTP 2004 – 2009.  The said machineries arrived at ICD Durgapur vide order in original dated 12.04.2010.  The 1^st respondent was directed to pay the customs duty of ₹ 1,39,89,366/- with applicable interest.  The 1^st respondent made a payment of ₹ 11 lakhs towards the duty. 

During 2014, the 1^st respondent filed a writ petition against the departmental action initiated for disposal of uncleared imported cargo.  The High Court dismissed the writ petition for non prosecution.  During 2016 the appellant department attempted to auction the uncleared goods of   1^st respondent through e-auction mode for three times which have not been succeeded since there was no participant in the auction.  The appellant vide their letter dated 16.02.2017 directed the 1^st respondent to clear the cargo from the custody of the customs authorities after paying the duties.  But the 1^st respondent did not pay the same.  Therefore the appellant tried for the fourth time to auction the goods. 

In the meantime corporate insolvency resolution process was initiated by the 1^st respondent itself.  The Adjudicating Authority vide their order dated 08.01.2018 allowed the application under section 10 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short).  The Adjudicating Authority appointed an interim resolution professional.  The Adjudicating Authority also declared moratorium.  Amidst the appellant conduct e-auction on 19.01.2018.  The fourth respondent in this case proposed the winning bid. 

The 1^st respondent as well as the interim resolution professional informed the appellant about the initiation of corporate insolvency resolution process and the moratorium declared by the Adjudicating Authority.  The interim resolution professional filed an application before the Adjudicating Authority with the prayer to direct the appellant not to proceed with e-auction of machineries of 1^st respondent and not to deal with the assets of the 1^st respondent.  The Adjudicating Authority allowed the application filed by the interim resolution professional.

Against the order of Adjudicating Authority the Department filed appeal before the National Company Law Appellate Tribunal (NCLAT).  The appellant submitted the following before the NCLAT-

• The impugned order does not refer the provisions of section 18(1)(f) of the Code whereby the interim resolution professional is empowered to take control and custody of any asset over which the corporate debtor (1^st respondent) has ownership rights as recorded in its balance sheet.
• The interim resolution professional can exercise  control only over items-

• asset of the corporate debtor;
• there exist ownership rights; and
• recorded in the balance sheet.

• The 1^st and 2^nd respondents have made no assertions in their pleadings before the Appellate Tribunal that the machinery in question, in fact belongs to 1^st respondent ‘asset’ and were recorded so in the balance sheet.
• The 1^st and 2^nd respondents cannot allege that the imported goods were assets of the corporate debtor, when customs duty leviable is yet to be discharged and the said goods are yet to be cleared for home consumption.
• In COLLECTOR OF CUSTOMS, CALCUTTA Versus DYTRON (INDIA) LTD. - 1998 (11) TMI 132 - HIGH COURT OF CALCUTTA  the Calcutta High Court held that unless and until statutory dues are paid, the imported goods would not form part of assets available for distribution  by the liquidator.
• The corporate debtor ownership rights in the imported goods have been relinquished by operation of law contained in section 48 of the Act.
• Section 48 of the Act allows the customs authorities to dispose unclaimed, uncleared, non duty paid imported goods after providing the importer with 30 day notice.
• The appellant has complied with the provisions of section 48 of the Act and after expiry of the statutory period the importer’s interest in the imported goods was confined to a reminder as provisions in section 150 of the Act.
• The impugned order’s reliance on section 28 of the Code is unsustainable.

The Resolution Professional submitted the following before the NCLAT-

• The resolution professional informed the appellant about the corporate insolvency resolution process and the moratorium imposed under section14 of the Code in relation to the proceedings against the corporate debtor.
• The 3^rd respondent has itself admitted that it was aware of the initiation of corporate insolvency resolution process on 19.01.2018 i.e. prior to the auction of the goods.
• Section 238 of the Code specifically provides that the Code will override other laws in case of any inconsistency and accordingly section 14 of the Code which provides for suspension/bar on all proceedings with regard to corporate debit post initiation of corporate insolvency resolution process  will be applicable to the present case.
• The goods under challenge were imported by the corporate debtor/1^st respondent and the invoices of the corporate debtor/1^st respondent have not been challenged, therefore, clearly establishing the ownership of the corporate debtor to the said goods.
• The seizure of the goods does not in any way transfer the title/ownership of the goods to the respondent, who, in accordance with law, was required to release the goods to the corporate debtor on payment of customs duty.

The Appellate Tribunal heard both the sides.  The Appellate Tribunal observed from the facts of the case it is clear that the corporate debtor had imported two consignments from Italy in 2009 which arrived at ICD Durgapur on 13.04.2009 and 27.04.2009  respectively.  It is clear that the machineries, in question, belonged to the corporate debtor (1^st respondent).

The Appellate Tribunal analyzed the provisions of section 48 of the Act.  The Appellate Tribunal observed that it is clear that in case of non clearance of the goods within 30 days or within extended period or if the title of any imported goods is relinquished after notice to the importer and with the permission of the proper officer, the goods can be sold by the customs authority.

The Appellate Tribunal analyzed the provisions of section 18 and 14 of the Code.  The Appellate Tribunal observed that the ownership rights of the machineries, in question, is of the corporate debtor and not of a third party, explanation below section 18(1)(f) & (g) is not applicable.  Therefore the Resolution Professional has right to take control and custody of any asset, though the Customs Authority is in possession of the same for the present.  During the period of moratorium the assets of the corporate debtor cannot be alienated, transferred or sold to a third party.

The Appellate Authority held that the order of moratorium having passed by the Adjudicating Authority on 08.01.2018, immediately thereafter it was not open to the appellant to issue e-auction notice on 15.01.2018 fixing date of auction of the goods on 19.01.2018.

The Appellate Authority held that there is no ground to interfere with the impugned order dated 03.07.2018 passed by the Adjudicating Authority.