AUCTION SALE OF ASSETS OF CORPORATE DETBROR BY CUSTOMS AUTHORITY DURING CORPORATE INSOLVENCY RESOLUTION PROCESS

[Mr. M. GOVINDARAJAN]

Practising Company Secretary

Clearance of imported goods

Chapter VII of the Customs Act,1962 deals with the procedure for clearance of imported goods. All imported goods unloaded in a customs area shall remain in the custody of such person as may be approved by the Principal Commissioner of Customs or Commissioner of Customs until they are cleared for home consumption or are warehoused or are transshipped in accordance with the provisions of Chapter VIII.

Section 48 of the Customs 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. 

Issue

As per section 48 of the Customs Act the proper officer under the Customs Act, 1962 is having power to sell the goods after notice to the importer and with the permission of the proper officer, if the 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 unloading thereof at a customs station or within such further time as may be extended.  The issue to be discussed in this article is whether the proper officer under section 48 of the Customs Act, 1962 can sell the articles when the importer, being the corporate debtor is put under corporate insolvency resolution process under Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) with reference to decided case law.

Case law

In ‘Commissioner of Customs (Preventive), West Bengal v. Ram Swarup Industries Limited’ – (2019) 153 CLA 56 (NCLAT) Ram Swarup Industries Limited (‘respondent’ for short) had imported two consignments of machines from Italy by claiming the benefit of EPCG scheme under Foreign Trade Policy 2004 – 2009.  The said machines arrived at ICD, Durgapur on 13.04.2009 and 27.04.2009.  The Assistant Commissioner, ICD, Durgapur assessed the goods and directed the respondent to pay the customs duty to the tune of ₹ 1,39,89,366/-. 

The respondent paid the customs duty of ₹ 11 lakhs on 14.01.2012. But he did not pay the balance amount. Therefore the department initiated for the disposal of the said goods by means of auction. The respondent filed a writ petition before the High Court against the departmental action for disposal of uncleared imported cargo. The High Court dismissed the said writ petition on 10.09.2014. The department attempted three a time for e-auction of the goods on 07.03.2016,17.08.2016 and 04.10.2016. The auction could not be done since there is no response from the buyers. Therefore the Department gave the respondent three months’ time vide their letter dated 16.02.2017, as requested by the appellant, to clear the cargo from the custody of the customs authorities after paying the customs duties. Since there was no response from the respondent  the appellant  Department on 30.08.2017 initiated the process for the disposal of the said uncleared cargo by way of auction for the fourth time. The appellant conducted the e-auction on 19.01.2018. The fourth respondent in this case is the winner of the bid.

In the meantime, the respondent filed an application for initiation of corporate insolvency resolution process before the Adjudicating Authority under section 10 of the Code.  On 08.01.2018 the Adjudicating Authority allowed the application and declared moratorium under section 14 of the Code. The respondent received the letter of the department containing the details of e-auction conducted on 19.01.2018. The respondent also received the order dated 08.01.2018 of the Adjudicating Authority admitting the application for corporate insolvency resolution process.

On 03.07.2018 the resolution professional filed an application before the Adjudicating Authority with the prayer to issue directions to the appellant Department not to proceed with e-auction of the machineries and not to deal with the assets of the corporate debtor. The Adjudicating Authority allowed this application on 03.07.2018. The Department filed the present appeal before the Appellate Tribunal against the order of the Adjudicating Authority dated 03.07.2018.

The appellant department submitted the following before the Appellate Tribunal-

• 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 has ownership rights as recorded in the balance sheet.
• The interim resolution professional can exercise control only over the items which are-

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

• The first respondent and second respondent have made no assertion in their pleadings before the Appellate Tribunal that the machinery in question, in fact, belongs to the 1^st respondent, i.e., corporate debtor and the assets were recorded in the balance sheet.
• The extent of interim resolution professional’s power of control of co-terminus with the corporate debtors’ ownership rights and in the present case, the corporate debtor, i.e., 1^st respondent has never acquired complete ownership of the imported goods.
• The first two 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.
• Unless and until statutory goods are paid, the imported goods would not form part of ‘assets’ available for distribution by the company.
• The corporate debtors’ ownership rights in the imported goods have been relinquished by operation of law contained in section 48 of the Customs Act, 1962.
• Section 48 allows customs authorities to dispose unclaimed, uncleared, non duty paid imported goods after providing the importer with 30 days notice.
• The department has duly complied with the provisions of section 48 of the Customs Act, 1962 and after the expiry of the statutory period the importer’s interest in the imported good was confined to a reminder interest as provided in section 150 of the Customs Act, 1962.
• The impugned order’s reliance of section 228 of the Code is unsustainable.

The resolution professional submitted the following-

• The corporate insolvency resolution process of the first respondent was initiated vide order dated 08.01.2018 by the Adjudicating Authority.
• The department issued e-auction notice on 15.01.2018, fixing date of auction of the goods on 19.01.2018.
• The Managing Director of the corporate debtor informed the Department that the corporate insolvency resolution process has been initiated with regard to the first respondent and that moratorium under section 14 of the Code, suspending/barring all proceeding relating to first respondent has come into force.
• The resolution professional also intimated the above said fact to the Department.
• One of the authorities of the department admitted that it was aware of the initiation of corporate insolvency resolution process on 19.01.2018, prior to the auction of the goods.
• Section 238 of the Code specifically provides that the Code will override all 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 debtor post initiation of corporate insolvency resolution process will be applicable to the present case.
• The goods under challenge by the corporate debtor and the invoices of the corporate debtor have not been challenged, therefore, it is clearly established that the corporate debtor is the ownership of the goods.
• The seizure of the goods in any way does not transfer the title/ownership of the goods to the department, who was required to release the goods to the corporate debtor on payment of customs duty.

The Appellate Tribunal heard the submissions put forth by the Department and the insolvency resolution professional. The Appellate Tribunal observed that it is clear that the corporate debtor had imported two consignments which arrived at ICD, Durgapur on 13.04.2009 and 27.04.2009 respectively. Thereby it is clear that the machineries, in question, belonged to the corporate debtor and not of a third party.  Therefore, in the corporate insolvency resolution process of the first respondent, the resolution professional has the right to take control and custody of any asset, through the Customs Authority is in possession of the same for the present.

The Appellate Tribunal analyzed the provisions of Section 48 of the Customs Act, section 14 and section 18(1)(f) of the Code. From the said provisions it is clear that during the period of moratorium, the assets of the corporate debtor cannot be alienated, transferred or sold to a third party. Therefore the Appellate Tribunal held that it is not open to the Department to issue an e-auction notice on 15.01.2018 fixing the date of auction of the goods on 19.01.2018 after the issue of the order of moratorium by the Adjudicating Authority. The Appellate Tribunal upheld the order of the Adjudicating Authority. 

The Adjudicating Authority, in its order, advised the Department to submit claim for the amount due with the resolution professional.  The Department is bound to repay the amount to the bidder in conducting illegal sale proceeding, since the sale proceeding is void ab-initio.