TNE PROVISIONS OF INSOLVENCY AND BANKRUPTCY CODE, 2016 WOULD PREVAIL OVER THE CUSTOMS ACT, 1962

[Mr. M. GOVINDARAJAN]

Clearance of goods

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.

Sales of uncleared goods

Section 72(1) of the Customs Act provides that in any of the following cases-

• where any warehoused goods are removed from a warehouse in contravention of section 71;
• 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;
• 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.

Section 72(2) provides that 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 may deem fit.

Liability of Customs to be the first charge

Section 142-A of the  Customs Act provides that 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, the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993, Securitization and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short), be the first charge on the property of the assessee or the person, as the case may be.

Issue

The issue to be discussed in this article is as to whether the Customs Department may take actions to recover the customs duty for the uncleared imported goods from a Company which is undergoing corporate insolvency resolution process/liquidation process with reference to decided case law.

Case law

The Supreme Court in SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD VERSUS CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS - 2022 (8) TMI 1161 - SUPREME COURT, held that the Customs Department cannot recovery the dues from the company which is undergoing corporate insolvency resolution process/liquidation proceedings since the provisions of the Code are prevailing over the provisions of the Customs Act.

In the above case, the respondent ABC shipyard was in the business of shipbuilding.    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 ABC Shipyard in Custom Bonded Warehouses in Gujarat and Container Freight Stations in Maharashtra. Bills of entry for warehousing were submitted at the relevant time.  It also took the benefit of an Export Promotion Capital Goods Scheme (‘EPCG Scheme’ for short) and also got a licence for the same.

Corporate insolvency resolution process was initiated against ABC Shipyard (‘Corporate Debtor’).  The Adjudicating Authority admitted the application 01.08.2017.  Shri Sundaresh Bhatt, the appellant in this case, was appointed as Interim Resolution Professional.   The Adjudicating Authority declared a moratorium under section 13(1)(a) of the Code.  On assuming the charges as Interim Resolution Professional,  the appellant informed the respondent department about the initiation of corporate insolvency resolution process against the corporate debtor and sought the custody of the warehoused goods and requested the respondent not to dispose of or auction the same.

The respondent for the first time, issued a notice to the Corporate Debtor regarding nonfulfilment of export obligations in terms of the EPCG license demanding customs duty of Rs. 17,13,989/- with interest on 29.03.2019.  The respondent also issued letters at five different times to the corporate debtor demanding the said amount.

The Adjudicating Authority passed an order commencing liquidation against the Corporate Debtor under Section 33(2) of the Code.  Even though the moratorium imposed has been ceased the Adjudicating Authority issued directions under section 33(5) of the Code barring the institution of any suit or legal proceeding by or against the Corporate Debtor. The appellant was appointed as liquidator.

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 Code.  The appellant informed the respondent that liquidation proceedings had commenced against the Corporate Debtor and that the goods were to be released to the appellant.  Since the goods were not released by the respondent the appellant filed an application before the Adjudicating Authority  under Section 60(5) of the Code seeking a direction against the Respondent to release the warehoused goods belonging to the Corporate Debtor on 01.07.2019.

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. 

On 25.02.2020 the Adjudicating Authority issued order on the application filed by appellant as detailed below-

• 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 within two weeks from the date of receipt of the order.
•  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 the Code.
• 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 Code and put the applicant/liquidator of the Corporate Debtor company (under liquidation) in disadvantageous position.

Further the Adjudicating Authority held as follows-

• Section 238 of the Cod, the non obstante clause in the Code, being part of a subsequent law, shall have overriding effect on proceedings under the Customs Act.
• The distribution of proceedings from sale of liquidation of assets under section 53 of the Code shall also prevail over the Customs Act provisions. 
• The Government dues, the claims by the respondent would have to be dealt with in accordance with Section 53 of the Code.
• Circular No. 1053/02/2017-CX, dated 10.03.2017 relating to Section 11E of the Central Excise Act, 1944 provided that  first charge only after the dues under the provisions of the Code are recovered.   Section 142A of the Customs Act is pari materia with Section 11E of the Central Excise Act, 1944, the Adjudicating Authority applied the same rationale to interpret the said section in holding that the provisions of the Code have priority.

The respondent filed appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short) against the order of Adjudicating Authority dated 25.02.2020.  The NCLAT allowed the appeal and set aside the order of Adjudicating Authority directing the respondent department to release the goods to the Liquidator.  The NCLAT 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 Corporate Debtor had relinquished his title to the imported goods.  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.  Therefore the respondent is empowered to sell the goods and recover the government dues.

Aggrieved against the order of NCLAT, the appellant filed the present appeal before the Supreme Court.  The appellant submitted the following before the Supreme Court-

• Section 48 of the Customs Act stated that it only applies to goods which are neither cleared nor warehoused by the importer. It is not applicable to the present case as the notice issued and Form C filed by the respondent are in relation to warehoused goods.  Therefore 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.
• The respondent filed its claim with the liquidator, which shows that the respondent has admitted that the Corporate Debtor is the owner.
• The Corporate Debtor has also never relinquished title to the goods and no communication regarding the same has been made to the respondent.
• 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 Code.
• The respondent’s custody of the Corporate Debtor’s goods is in violation of Sections 14 and 33 of the Code which expressly prohibits the institution or continuation of proceedings against the Corporate Debtor during the moratorium period. The foreclosure, recovery, or enforcement of any security interest against the Corporate Debtor is also prohibited.

The respondent Department submitted the following before the Supreme Court-

• The goods were imported between the years 2012 and 2015, and the Corporate Debtor started the liquidation process in 2019.
• The Corporate Debtor never cleared bills of entry for part of the goods and abandoned all the material lying in the Custom Bonded Warehouse. 
• Since the Corporate debtor did not clear the goods the same are liable to be sold by the respondent under the Customs Act.
• 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 goods has been deemed to have been relinquished, the liquidator does not have the authority to take possession of them.
•  Even before the corporate insolvency resolution process was initiated, the Corporate Debtor could not have secured the possession of the warehoused goods without paying the due charges.
• The liquidator, who is representing the Corporate Debtor, cannot stand on a better footing than the Corporate Debtor itself.
• 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 Supreme Court considered the submissions of both the appellant and the respondent Department.  The Supreme Court considered the following two questions to be answered in the present appeal-

• Whether the provisions of the Code would prevail over the Customs Act, and if so, to what extent?
• 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?

The Supreme Court analyzed the provisions of Customs Act relating to import of goods and also the provisions of the Code in relation to moratorium. 

The Supreme Court observed that one of the purposes 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.  One of the motivations of imposing a moratorium is for Section 14(1)(a), (b), and (c) of the Code 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.   Even if a company goes into liquidation, a moratorium continues in terms of Section 33(5) of the Code.

Section 142A of the Customs Act provides that the Custom Authorities would have first charge on the assets of an assessee under the Customs Act, except with respect to cases under Section 529A of Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Code.

The Supreme Court further observed that the Customs Actand the Code act in their own spheres. In case of any conflict, the Code overrides the Customs Act.    The first notice sent by the respondent authority was on 29.03.2019.   When insolvency resolution failed and the liquidation process began, the Adjudicating Authority passed an order on 25.04.2019 imposing moratorium under Section 33(5) of the Code. 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.  The Supreme Court held 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 Code.   The authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium. 

The Customs Act and Code 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 Code before the liquidator. However, the respondent does not have the power to execute its claim beyond the ambit of Section 53 of the Code.    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 ignored by NCLAT and has resulted in rendering the moratorium otiose.

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 Code, 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.

The Supreme Court held that-

• The Code would prevail over The Customs Act, to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the Code 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
• The respondent could not 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.

The Supreme Court allowed the appeal filed by the appellant and set aside the order of the NCLAT.