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TMI Blog2022 (8) TMI 1161X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 onwards. It is in this context that it is necessary for us to ascertain whether the IBC overrides the Customs Act or vice-versa. 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. One of the motivations of imposing a moratorium is for Section 14(1)(a), (b), and (c) of the IBC to 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 soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent 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 Corporat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The NCLT considered Section 238 of the IBC and held that the nonobstante clause in the IBC, being part of a subsequent law, 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 app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous 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 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctment 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: 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense, 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 aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a breathing space to organize its affairs, time for preparation and approval of a reorganization plan and for other steps such as shedding unprofitable activities and onerous contracts, where 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 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. 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 prior approval of the Adjudicating Authority. 38 We may note that the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es issued by the respondent are plainly in the teeth of Section 14 of the IBC as they were issued after the initiation of the CIRP 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 respondent 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 seek 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 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 or reassessment 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against a Corporate Debtor. Even under the liquidation process, the liquidator is given the responsibility to secure assets 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 14 of the IBC, read with Sections 25 and 33(5). Moreover, such deemed transfer cannot be countenanced in law as the same would 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. 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 respondent authority, does a Uturn on filing such claims and instead, unilaterally decides to initiate recovery proceedings under Section 72(2) of 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 aftertho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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