2020 (7) TMI 359 - Tri - Insolvency and Bankruptcy

Liquidation of the Corporate Debtor - seeking to remove goods lying in Customs Bonded Warehouse without any condition, demur and/or payment of Customs Duty - Waterfall Mechanism of section 53 of the Insolvency and Bankruptcy Code, 2016 - CBEC Circular No. 1053/02/2017-CX dated March 10, 2017 - HELD THAT - Both the Acts, Insolvency and Bankruptcy Code, 2016 as well as Central Excise Act, on the subject, as both the statutes are having status of special law and contains non obstante clause under section 142A of the Customs Act, 1962, as well as section IIE of the Central Excise Act, 1994, and, thus, having priority for distribution of proceeds including the liquidation of assets. Hon'ble Supreme Court came to an occasion to examine similar legal position in its landmark decision in SOLIDAIRE INDIA LTD. VERSUS FAIRGROWTH FINANCIAL SERVICES LTD. 2001 (2) TMI 968 - SUPREME COURT and MARUTI UDYOG LTD. VERSUS RAM LAL ORS. 2005 (1) TMI 671 - SUPREME COURT wherein Their Lordships have pleased to observe and rule that if there are two special statues, which contain non obstante provisions, the later statute must prevail. Therefore, by virtue of section 238 of the Code being the later statute, the Applicant submits that section 238 of the Insolvency and Bankruptcy Code, 2016, being a subsequent law, the proceedings contained therein shall have overriding effect on the other proceedings of Custom Act and Central Excise Act. Therefore, by following the above stated ruling, in our humble view, the provisions of section 53 described about the Insolvency and Bankruptcy Code, which provides manner for priority to be given for making distribution of proceedings from sale of liquidation assets shall prevail over the provisions of section 11(e) of the Central Excise Act and other provisions of Customs Act. Hence, the Respondents' Department cannot legally withhold the releasing of the material/goods, which the property of the Corporate Debtor company (in liquidation) as pre-requisite condition for making the Customs duty by the Liquidator of Corporate Debtor company (in liquidation), because the claims of the respondents' departments have to be treated as Government dues and needs to be dealt with under the Waterfall Mechanism of section 53 of Insolvency and Bankruptcy Code. By placing reliance on the judicial precedents read with the clarificatory circular issued dated 10-3-2017 (Subject Master Circular on Show Cause Notice, Adjudication and Recovery-reg.) which states that the dues of the Income-tax Department have priority after the dues, if any, under the provisions of the Companies Act, Recovery of Debt due to Banks and Financial Institutions Act, 1993 and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and Insolvency and Bankruptcy Code, 2016. 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 - Application allowed..

Summary

Issues Involved:
1. Removal of materials from customs bonded warehouses without payment of customs duty.
2. Priority of claims under the Insolvency and Bankruptcy Code (IBC) over the Customs Act.
3. Application of the non-obstante clause in conflicting statutes.
4. Distribution of proceeds from the sale of liquidation assets under section 53 of the IBC.

Issue-wise Detailed Analysis:

1. Removal of Materials from Customs Bonded Warehouses Without Payment of Customs Duty:
The applicant-liquidator sought the removal of materials lying in customs bonded warehouses without any conditions or payment of customs duty. The materials were imported under the Export Promotion Capital Goods Scheme (EPCG Scheme) but the corporate debtor failed to submit the Export Obligation Discharge Certificate (EODC), leading to demands for customs duty by the Customs Authority.

2. Priority of Claims under the Insolvency and Bankruptcy Code (IBC) Over the Customs Act:
The applicant argued that section 238 of the IBC, which contains a non-obstante clause, gives the IBC provisions priority over other laws, including the Customs Act. The Customs Authority's claim for customs duty should be treated as government dues and dealt with under the waterfall mechanism of section 53 of the IBC.

3. Application of the Non-obstante Clause in Conflicting Statutes:
Both the Customs Act and the IBC contain non-obstante clauses. The applicant contended that in cases where two special statutes contain non-obstante clauses, the later statute (IBC in this case) prevails, citing Supreme Court decisions in Solidaire India (P.) Ltd. v. Fairgrowth Financial Services Ltd. and Maruti Udyog Ltd. v. Ram Lal.

4. Distribution of Proceeds from the Sale of Liquidation Assets Under Section 53 of the IBC:
The applicant emphasized that section 53 of the IBC provides a specific order of priority for distributing proceeds from the sale of liquidation assets. Government dues, including customs duty, are ranked under section 53(e)(i), which means they do not have priority over secured creditors and workmen's dues.

Judgment:
The Tribunal directed the Customs Department to allow the removal of materials from customs bonded warehouses without payment of customs duty. The Customs Department was instructed to lodge their claims with the liquidator under the provisions of the IBC. The Tribunal emphasized that the IBC's provisions, being the later statute, have an overriding effect over the Customs Act. The Customs Department was also restrained from auctioning or selling the materials, which would violate the IBC and disadvantage the liquidator.

Conclusion:
The Tribunal allowed the application, directing the Customs Department to release the materials without customs duty payment and to lodge claims with the liquidator. The decision reinforced the precedence of the IBC over the Customs Act in liquidation proceedings, ensuring the distribution of assets follows the order of priority under section 53 of the IBC.