SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD versus CENTRAL BOARD OF INDIRECT TAXES AND CUSTOMS on 26 August 2022

1. The present Civil Appeal under Section 62(1) of the Insolvencyand Bankruptcy Code, 2016 (“IBC”) arises out of the impugned judgmentdated 22.11.2021 passed by the National Company Law AppellateTribunal, New Delhi (“NCLAT”) in Company Appeal (AT) (Insolvency)No. 236 of 2021. Vide the impugned judgment, the NCLAT has allowedthe appeal filed by the respondent against the order of the NationalCompany Law Tribunal, Ahmedabad (“NCLT”) /Adjudicating Authoritywhereby the Adjudicating Authority directed the release of certain goodslying in the Customs Bonded Warehouses without payment of customduty and other levies.

2. A conspectus of the facts necessary for the disposal of thepresent appeal is as follows: ABG Shipyard (“Corporate Debtor”)was in the business of shipbuilding prior to the initiation of corporateinsolvency proceedings against it. As a part of its business enterprise, itused to regularly import various materials for the purpose of constructingships which were to be exported on completion. Some of these goodswere stored by the Corporate Debtor in Custom Bonded Warehouses inGujarat and Container Freight Stations in Maharashtra. Bills of entry forwarehousing were submitted at the relevant time. The Corporate Debtoralso 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 CorporateInsolvency Resolution Process (“CIRP”) against the Corporate Debtor,and the appellant was appointed as the Interim Resolution Professional.In the same order, the NCLT also declared a moratorium under Section13(1)(a) of the IBC.

4. On 21.08.2017, the appellant informed the respondent of theinitiation of CIRP and sought custody of the warehoused goods andrequested the respondent not to dispose of or auction the same. On29.03.2019, the respondent for the first time, issued a notice to theCorporate Debtor regarding non-fulfilment of export obligations in termsof the EPCG license demanding customs duty of Rs. 17,13,989/- withinterest. From 02.04.2019 to 07.04.2019, the respondent issued five A

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Adifferent demand notices to the Corporate Debtor regarding non-fulfillment of export obligations under different EPCG licenses for variousamounts. The details of the demand notices issued by the Respondentfor non-fulfilment of EPCG License conditions by the Corporate Debtorare tabulated herein for ease of reference:

5. On 25.04.2019, the NCLT passed an order commencingliquidation against the Corporate Debtor under Section 33(2) of the IBC.DVide the said order, the NCLT declared that the earlier moratoriumimposed under Section 13(1)(a) of the IBC shall cease to have effect bythe operation of Section 14(4) of the IBC. However, a fresh directionwas passed under Section 33(5) of the IBC barring the institution of anysuit or legal proceeding by or against the Corporate Debtor. Further, theENCLT also appointed the appellant as the liquidator vide the same order.

6. Thereafter, the respondent filed claims before the appellant forgoods 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 appellantinformed the respondent through its officers that liquidation proceedingshad commenced against the Corporate Debtor and that the goods wereFto 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 adirection against the Respondent to release the warehoused goodsbelonging to the Corporate Debtor on 01.07.2019.

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8. At this juncture, for the first time on 11.07.2019, the respondentissued a notice to the Corporate Debtor under Section 72(1) of theCustoms Act for custom dues amounting to Rs. 763,12,72,645/- on 2531Bills of entries. The respondent filed a concurrent claim for the saidamount before the appellant under the IBC. Details of the amount claimedHby the respondent before the appellant are as follows:

9. On 25.02.2020, the NCLT allowed I.A. No. 474 of 2019 filedby the appellant and passed the following directions:

“14) Therefore, the present IA deserves to be allowed.Accordingly, it is allowed in terms of its prayer clause as well aswith following directions.

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i)The Respondents are directed to allow the applicant-liquidator to remove the Material, which is lying in theCustoms Bonded Warehouses without any condition,demur and/ or payment of Customs Duty.

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ii)The Respondents are at liberty to lodge its claim withthe Applicant-Liquidator with regard to the Customs Dutycharges payable on the release of material, which formpart of the assets of the Corporate Debtor company (inEliquidation), before the Liquidator under the provisionsof Insolvency and Bankruptcy Code, 2016 and inaccordance with law.

iii)The Customs Department shall allow removal of goods/material within two weeks, from the date of receipt ofan authentic copy of this order from the Liquidator.

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iv)Meanwhile, the Respondents shall not proceed forauctioning, selling or appropriating the Materials ownedby the Corporate Debtor company, for the purpose ofrecovery of its Customs Duty, which may tantamount toviolation of the l&B Code and put the applicant/liquidatorGof the Corporate Debtor company (under liquidation) indisadvantageous position.”

10. The NCLT considered Section 238 of the IBC and held thatthe non-obstante clause in the IBC, being part of a subsequent law, H

Ashall have overriding effect on proceedings under the Customs Act.Further, looking to the waterfall mechanism under Section 53 of theIBC, the NCLT held that distribution of proceedings from sale of liquidationof assets shall also prevail over the Customs Act provisions. The NCLTheld that, as Government dues, the claims by the respondent would haveto be dealt with in accordance with Section 53 of the IBC. Apart fromBthe above, the NCLT also placed reliance on a circular issued by theCentral Board of Excise and Custom, being Circular No. 1053/02/2017-CX dated 10.03.2017 relating to Section 11E of the Central Excise Act,1944. The abovementioned circular clarifies that dues under the CentralExcise Act would have first charge only after the dues under theCprovisions of the IBC are recovered. As Section 142A of the CustomsAct is pari materia with Section 11E of the Central Excise Act,1944,the NCLT applied the same rationale to interpret the said section inholding that the provisions of the IBC have priority.

11. Subsequent to the above judgment, the appellant sold the goodswarehoused in Surat for a consideration of Rs. 169.11 crores. The salesDprocess with respect to the goods warehoused in Dahej, Gujarat iscurrently ongoing, and is challenged before this Court in C.A. No. 7722of 2021 and C.A. No. 7731 of 2021.

12. On 04.03.2021, the respondent filed an appeal before NCLATchallenging the order dated 25.02.2020 passed by the NCLT. OnE22.11.2021, the NCLAT passed the impugned order, whereby it allowedthe appeal filed by the respondent and set aside the directions of theNCLT requiring the respondent to release the warehoused goods to thepossession of the appellant without seeking the custom dues. The NCLATrather directed that the warehoused goods can be “released or disposedFof as per Applicable Provisions of Customs Act by the ProperOfficer”.

13. The NCLAT, in allowing the appeal of the respondent, heldthat the goods lying in the customs bonded warehouse were not theCorporate Debtor’s assets as they were neither claimed by the CorporateDebtor after their import, nor were the bills of entry cleared for some ofGthe said goods. By not filing the said bills of entry, the NCLAT held thatthe importer, i.e., the Corporate Debtor, had relinquished his title to theimported goods. The NCLAT held that the Corporate Debtor is deemedto have lost his title to the imported goods by action of Sections 48 and72 of the Customs Act. As such, the respondent is empowered to sellHthe goods and recover the government dues.

14. The NCLAT held that ‘imported goods’, which are subject tolevy of Customs, stand on a different footing as payment of customsduty is a consequence of importing the goods rather than a liability onthe Corporate Debtor to pay it. The appellant cannot stand at a betterfooting than the Corporate Debtor that he represents and cannot takepossession of assets which the Corporate Debtor itself could not haveobtained. Customs duty therefore needs to be paid for the release of thewarehoused goods.

15. The NCLAT held that the Customs Act is a complete Codewhich provides that warehoused goods cannot be released until the importduties are paid. Mere filing of claims under ‘Form C’ by the respondentbefore the appellant cannot be taken to signify the relinquishment of theright of the respondent over the warehoused goods.

16. On the issue of priority of IBC over the Customs Act, theNCLAT held that the issue did not arise in the present case, as the goodsin question were imported prior in time to the initiation of the CIRP.While the containers were imported between 2012 to 2015, the CIRPwas initiated only in 2017 and the Corporate Debtor went into liquidationin 2019. By not paying the import duties, the Corporate Debtor had lostthe right to the warehoused goods prior to the initiation of the CIRP. TheNCLAT held that these warehoused goods stand on a different footingand cannot be considered assets of the Corporate Debtor which weresubject to the IBC provisions.

17. Aggrieved by the above judgment passed by the NCLAT, theappellant has filed the present Civil Appeal against the impugned judgment.

18. Mr. Arvind Datar, learned Senior Counsel appearing on behalfof the appellant, submitted as follows:

i.The Corporate Debtor is the owner of the goods. The learnedSenior Counsel referred to Section 48 of the Customs Actand stated that it only applies to goods which are neithercleared nor warehoused by the importer. This Section,however, is not applicable to the present case as the noticeissued and Form C filed by the respondent are in relation towarehoused goods. Thus, the notice issued by therespondent under Section 72 of the Customs Act and theconsequent Form C does not in any manner attract Section48 of the Customs Act.

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648SUPREME COURT REPORTS

Aii.The Corporate Debtor has not lost ownership of the goodsas alleged by the respondent. The respondent, by issuingnotice under Section 72 of the Customs Act and filing itsclaim with the liquidator, has admitted that the CorporateDebtor is the owner. Neither Sections 72 nor 48 of theCustoms Act signifies any transfer to the respondent. TheBCorporate Debtor has also never relinquished title to thegoods and no communication regarding the same has beenmade to the respondent.

iii.By submitting claims under Section 38 of the IBC, therespondent has elected to subject its dues to be governedCby IBC, and more specifically, to the distribution matrixprovided Section 53 of the IBC. The claims made by therespondent before the appellant are based solely on theCorporate Debtor’s ownership of the goods. The respondentcannot blow hot and cold at the same time by again claimingDbefore this Court that the Corporate Debtor has lostownership of the said goods.

iv.The respondent could not have exercised its right under theCustoms Act, as the statutory charge of the respondentunder Section 142A of the Customs Act is expresslyEsubordinate to the IBC.

v.The respondent’s custody of the Corporate Debtor’s goodsis in violation of Sections 14 and 33 of the IBC. Section14(1)(a) of the IBC expressly prohibits the institution orcontinuation of proceedings against the Corporate DebtorFduring the moratorium period. Further, Section 14(1)(c)states that foreclosure, recovery, or enforcement of anysecurity interest against the Corporate Debtor is prohibited.

19. Mr. K.M. Nataraj, learned Additional Solicitor General of Indiaappearing for the respondent, submitted as under:

Gi.The goods left in the Custom Bonded Warehouse are notthe assets of the Corporate Debtor. This is because thesegoods were never claimed after being imported. As per therecord, the goods were imported between the years 2012and 2015, and the Corporate Debtor started the liquidationprocess in 2019. In this span of 4 years, the CorporateH

Debtor never cleared bills of entry for part of the goodsand abandoned all the material lying in the Custom BondedWarehouse. Despite receipt of various demand notices bythe respondent, the Corporate Debtor did not clear the goodsand hence the same are liable to be sold by the respondentunder the Customs Act.

ii.The liquidator can take into his possession only the assetsof the Corporate Debtor as under Section 35(1)(b) of theIBC. However, in the present case, the warehoused goodscannot be termed as assets of the Corporate Debtor, untiland unless the same are legally cleared from the warehousesupon payment of relevant dues and duties. The CorporateDebtor herein has not even paid the bill of entry for part ofthe goods.

iii.Section 45 of the Customs Act lays down restrictions oncustody and removal of imported goods. It stipulates thatall imported goods unloaded in the customs area shall remainin the custody of such person approved by the commissionertill the time the same are cleared for home consumption orare warehoused or transshipped. Further, it provides that ifsuch goods are not cleared as per the criteria mentionedabove, they can be sold after permission from the properofficer. Section 71 of the Customs Act further states thatno goods shall be taken out of the warehouse except asprovided under by the Customs Act. Hence, the goodscannot be removed without payment of import duties andcharges.

iv.The Corporate Debtor has abandoned the imported goodsfor several years, refused to pay the import duties and othercharges, and has not taken any effort to take possession ofthe goods for several years. Consequently, the CorporateDebtor has lost its right to the warehoused goods, and henceunder Section 72 of the Customs Act, the governmentauthorities are fully authorized to recover the dues. In sucha circumstance, where the Corporate Debtor’s title to thegoods has been deemed to have been relinquished, theliquidator does not have the authority to take possession ofthem.

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Av.Customs duty is an incidence or consequence of import.Even before the CIRP was initiated, the Corporate Debtorcould not have secured the possession of the warehousedgoods without paying the due charges. Hence, the liquidator,who is representing the Corporate Debtor, cannot stand ona better footing than the Corporate Debtor itself.

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vi.It is further submitted that merely because the respondenthad filed its claim before the liquidator, it cannot be saidthat the respondent had relinquished its rights over thewarehoused goods. The claim was filed by the respondentonly to realize its dues, and hence cannot be viewed as aCrelinquishment or abandonment of its rights.

20. In light of the arguments advanced and the documentssubmitted before this Court, we are called upon to answer two importantquestions which arise for our consideration:

a)Whether the provisions of the IBC would prevail over theCustoms Act, and if so, to what extent?

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b)Whether the respondent could claim title over the goodsand issue notice to sell the goods in terms of the CustomsAct when the liquidation process has been initiated?

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21. It must be noted that this question assumes significance as thewarehoused goods belonging to the Corporate Debtor which is underliquidation, are sought to be sold by the Customs Authorities in lieu ofcustom dues. The respondent has relied on certain provisions of theFCustoms Act to assume such power. This has been vehemently opposedby the appellant herein, who has argued that once the insolvency processhas been initiated against the Corporate Debtor, the IBC becomes squarelyapplicable and overrides any other enactment giving priority to the chargeson the property.G22. The NCLAT has not directly answered this question of law.

G22. The NCLAT has not directly answered this question of law.Rather, it has entered into the facts of the case to distinguish theapplicability of the IBC as compared to the Customs Act. The NCLATheld that the Corporate Debtor had abandoned the goods much beforethe insolvency process was initiated, and thereby the title of the goodshad passed to the Customs Authority. The NCLAT held as under:H

“7.16 Thus, it is clear that NCLT and NCLAT cannot usurp thelegitimate jurisdiction of other Courts, Tribunals and fora whenthe dispute does not arise solely from or relating to the Insolvencyof the Corporate Debtor. In the instant case, the Corporate Debtorhad abandoned the imported goods in the Customs warehousesfor several years and failed to pay the import duty and other chargesand had not taken any steps to take possession of those goods forseveral years. Therefore the importer had lost his right to theimported goods. Consequently, the Customs Authorities are fullyempowered under Section 72 of the Act to sell those goods torecover the government dues. The Liquidator has no right to takeinto possession over those goods for which the Corporate Debtor’stitle is deemed relinquished by implication of law. Even beforeinitiating the Corporate Insolvency Resolution Process, theCorporate Debtor Company could not have secured the possessionof the imported goods except by paying the customs duty. TheResolution Professional/Liquidator, who virtually represents theCompany, cannot stand on a better footing than the CorporateDebtor itself.

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7.20 In the instant case, the Appellant has filed its Claim beforethe Liquidator in response to the Notice issued by the Liquidator.Given the law laid down by the Hon’ble Supreme Court in theabove-mentioned case, it is clear that by submission of Claim inresponse to the Notice issued by the Liquidator, it can not bepresumed that the Appellant had relinquished its right over theproperty and submitted to the jurisdiction of the Liquidator. TheClaim is filed in an effort to realise its dues. Still, it will not amountto relinquishment of its right over the Warehoused goods under itscustody for which Appellant has every right to sell those goodsfor the realisation of the Government goods.

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7.23 We are not convinced with the argument advanced by theRespondent because the goods imported by the Corporate Debtorwere imported much before the initiation of the CorporateInsolvency Resolution Process, and the Corporate Debtor neverclaimed them after import. Undisputedly the containers were AB

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imported between 2012 to 2015. The CIRP was initiated againstthe Corporate Debtor in 2017, and the liquidation order was passedon April 25 2019.

7.24 Therefore, the Corporate Debtor’s assets because theCorporate Debtor never made any effort for clearing the goodsBby paying Customs Duty and other applicable charges before theinitiation of Liquidation proceeding after importing them.Undisputedly the containers were imported between 2012 to 2015.The CIRP was initiated against the Corporate Debtor in 2017,and the liquidation order was passed in April 25, 2019. Thereforethe assets lying in the Customs bonded warehouses cannot beCconsidered assets of the Corporate Debtor. The Liquidator intendsto possess the uncleared goods from the customs warehouseswithout upfront payment of Customs duty, which is against thestatutory provisions of the Customs Act, 1962. Therefore, theimported goods subject to levy of Customs stand on a differentDfooting than the goods /assets, not in the Corporate Debtor’spossession. Therefore, the assets lying in the Customs bondedwarehouses cannot be considered assets of the Corporate Debtor.

23. In the above context, this Court is required to analyze whetherthe 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 atEhand, it would be beneficial to analyze certain provisions of the CustomsAct which may be relevant to this case.

24. When goods are imported/exported from India, such goodsmay be subjected to custom duty as indicated under Section 12 of theCustoms Act. There are many objectives behind such exaction – someFof it is to maintain trade balance, control imports and exports, protectionof domestic industry, prevention of smuggling, conservation andaugmentation of foreign exchange, and so on.

25. When goods are imported, it can be either for home consumptionor for transshipment. An importer can either choose to pay the duty andGutilize the goods immediately for domestic usage or execute a bond soas to warehouse the said goods. Accordingly, an importer has to submita bill of entry either for home consumption or for warehousing in termsof Section 46 of the Customs Act, in the prescribed format.

26. When a person chooses to warehouse the goods, he ought toexecute a bond in terms of Section 59 of the Customs Act. Such H

warehoused goods can subsequently be either cleared for homeconsumption or can be exported.

27. Section 61 of the Customs Act mandates the time periodallowed for warehousing. For example, in the case of capital goodsintended for a 100% export-oriented undertaking, warehousing is permittedtill such goods are cleared from the warehouse. In case of goods notintended for such export-oriented purpose, a time period of one year isprescribed in terms of Section 61(1)(c) of the Customs Act. The provisionalso provides for an extension which could be granted by the appropriateauthority, for a period of not more than one year. Under Section 61(2) ofthe Customs Act, provision is made to charge interest on those goodswhich are warehoused beyond the period granted.

28. Section 71 of the Customs Act provides that no warehousedgoods shall be taken out of the warehouse, except on clearance forhome consumption or export or for removal to another warehouse, or asprovided by the Act.

29. Section 72 of the Customs Act deals with the issue of whenthe goods can be said to have been improperly removed from thewarehouse. As this provision is of some relevance to the present case, itis extracted below:

“72. Goods improperly removed from warehouse, etc.—(1)In any of the following cases, that is to say,—

(a) where any warehoused goods are removed from a warehousein contravention of section 71; (b) where any warehoused goods have not been removed from awarehouse at the expiration of the period during which such goodsare permitted under section 61 to remain in a warehouse;

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(d) where any goods in respect of which a bond has been executedunder section 59 and which have not been cleared for homeconsumption or export or are not duly accounted for to thesatisfaction of the proper officer, the proper officer may demand,and the owner of such goods shall forthwith pay, the full amountof duty chargeable on account of such goods together with interest,fine and penalties payable in respect of such goods ABC

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A(2) If any owner fails to pay any amount demanded under sub-section (1), the proper officer may, without prejudice to any otherremedy, cause to be detained and sold, after notice to the owner(any transfer of the goods notwithstanding) such sufficient portionof his goods, if any, in the warehouse, as the said officer maydeem fit.”B

From the aforesaid, it can be noted that when goods arewarehoused and the importer has not taken sufficient steps to take thegoods out for domestic consumption or for transshipment, within therequired time period, then the proper office has to take steps in terms ofSection 72(2) of the Customs Act. The aforesaid provision mandate thatCit is only after the determination of dues by the proper officer that goodsmay be sold, in the event that the demanded amount relating to customduty, interest, fines, and other penalties have not been paid. In that casealone, after such determination, a sufficient portion of goods may besold.D30. In order to complete the discussion on the Customs Act, itmay be necessary to take note of Section 142A extracted below:

142A. Liability under Act to be first charge.—Notwithstandinganything to the contrary contained in any Central Act or StateAct, any amount of duty, penalty, interest or any other sum payableEby an assessee or any other person under this Act, shall, save asotherwise provided in section 529A of the Companies Act, 1956(1 of 1956), the Recovery of Debts Due to Banks and the FinancialInstitutions Act, 1993 (51 of 1993), and the Securitisation andReconstruction of Financial Assets and the Enforcement ofFSecurity Interest Act, 2002 (54 of 2002) and the Insolvency andBankruptcy Code, 2016 (31 of 2016)be the first charge on theproperty of the assessee or the person, as the case may be..

31. In the present case, the Corporate Debtor as part of its businessused to regularly import and warehoused goods in the custom bondedGwarehouses from at least 2011. As has already been mentioned above,the CIRP process commenced against the Corporate Debtor on 01.08.2017by the order of the NCLT. It appears from the record that no noticeswere issued by the respondent against the Corporate Debtor with respectto the warehoused goods prior to initiation of the CIRP. In fact, all theduty demand notices issued by the respondent were from March 2019H

onwards. It is in this context that it is necessary for us to ascertainwhether the IBC overrides the Customs Act or vice-versa.

32. Insolvency and Bankruptcy Code came into force in Indiafrom 28.05.2016 to combine provisions relating to insolvency found acrossdifferent statutes into a single comprehensive instrument. Under the earlierlegal regime, different statutes were resulting in multiple parallelproceedings, which inevitably resulted in uncertainty for the creditorsover their recovery. One of the objectives behind the enactment of theIBC was to end the conflict between different statutes.

33. The purpose behind insolvency law has been captured inHalsbury’s Laws of England (para 8, vol. III, 4[th] edition) in the followingmanner:

“A man has a perfect right, so long as he is solvent, to continue alosing business; but the moment he becomes insolvent he does soat the risk of his creditors. As soon as he finds that he cannot payloop in the pound, although he may nevertheless think that if hegoes on he may be able to retrieve his position, he ought to calltogether his creditors, who will have to bear the loss in case hiscalculations are wrong, and leave them to determine whether thebusiness shall be continued or not. Moreover, it is not enough toconsult only the largest creditors. There is no insolvency withinthe meaning of this offence if a careful, prudent, and unhurriedrealization of the assets would produce enough to pay loop in thepound on the amount of liabilities.”

34. It may be relevant to capture a brief outlook as to variousstages 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 11of the IBC) or the lender (creditors – financial creditorunder Section 7 or operational creditor under Section 9 ofthe IBC) can approach the NCLT for initiating the resolutionprocess. Operational creditors need to give a notice of 10days to the Corporate Debtor before approaching theNCLT. If the Corporate Debtor fails to repay dues to theoperational creditor, or fails to show any existing dispute orarbitration, then the operational creditor can approach theNCLT.

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A(ii)Upon admission of an application by the NCLT, the claimsof the creditor will be frozen for 180 days, during whichtime, the NCLT will hear proposals for revival of theCorporate Debtor and decide on future course of action.During this period, a moratorium is imposed to ensure nocoercive proceedings are launched or continued against theBCorporate Debtor in any other forum or under any otherlaw, until approval of the resolution plan or initiation of theliquidation process.

(iii) The NCLT first appoints an interim insolvency professional.The interim insolvency professional is to hold office until aCresolution professional is appointed. He further takes controlof the Corporate Debtor’s operations and collects itsfinancial information from information utilities. The NCLTmust also ensure public announcement of the initiation ofcorporate insolvency process and call for submission ofDclaims.

(iv) The Corporate insolvency process must normally becompleted within 180 days of admission of the applicationby the NCLT. The Committee of Creditors has to then takedecisions regarding insolvency resolution as provided by law.

E35. In this context, we may note that when the insolvency processcommences, the adjudicating authority is mandated to declare amoratorium on continuation or initiation of any coercive legal action againstthe Corporate Debtor. Section 14 of the IBC reads as under:

14. Moratorium.––(1) Subject to provisions of sub-sections (2)Fand (3), on the insolvency commencement date, the AdjudicatingAuthority shall by order declare moratorium for prohibiting all ofthe following, namely:—

(a) the institution of suits or continuation of pending suits orproceedings against the corporate debtor including execution ofGany judgment, decree or order in any court of law, tribunal,arbitration panel or other authority; (b) transferring, encumbering, alienating or disposing of by thecorporate debtor any of its assets or any legal right or beneficialinterest therein; H

(c) any action to foreclose, recover or enforce any security interestcreated by the corporate debtor in respect of its property includingany action under the Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act, 2002 (54 of2002); (d) the recovery of any property by an owner or lessor wheresuch property is occupied by or in the possession of the corporatedebtor.

Explanation.—For the purposes of this sub-section, it is herebyclarified that notwithstanding anything contained in any other lawfor the time being in force, a license, permit, registration, quota,concession, clearances or a similar grant or right given by theCentral Government, State Government, local authority, sectoralregulator or any other authority constituted under any other lawfor the time being in force, shall not be suspended or terminatedon the grounds of insolvency, subject to the condition that there isno default in payment of current dues arising for the use orcontinuation 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 corporatedebtor as may be specified shall not be terminated or suspendedor interrupted during moratorium period.

(2A) Where the interim resolution professional or resolutionprofessional, as the case may be, considers the supply of goods orservices critical to protect and preserve the value of the corporatedebtor and manage the operations of such corporate debtor as agoing concern, then the supply of such goods or services shall notbe terminated, suspended or interrupted during the period ofmoratorium, except where such corporate debtor has not paiddues arising from such supply during the moratorium period or insuch circumstances as may be specified.

(3) The provisions of sub-section (1) shall not apply to —

(a) such transactions, agreements or other arrangements as maybe notified by the Central Government in consultation with anyfinancial sector regulator or any other authority; (b) a surety in a contract of guarantee to a corporate debtor.

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A(4) The order of moratorium shall have effect from the date ofsuch order till the completion of the corporate insolvency resolutionprocess:

Provided that where at any time during the corporate insolvencyresolution process period, if the Adjudicating Authority approvesBthe resolution plan under sub-section (1) of section 31 or passesan order for liquidation of corporate debtor under section 33, themoratorium shall cease to have effect from the date of suchapproval or liquidation order, as the case may be.

36. Section 14 of the IBC prescribes a moratorium on the initiationCof CIRP proceedings and its effects. One of the purposes of themoratorium is to keep the assets of the Corporate Debtor together duringthe insolvency resolution process and to facilitate orderly completion ofthe processes envisaged under the statute. Such measures ensure thecurtailing of parallel proceedings and reduce the possibility of conflictingoutcomes in the process. In this context, it is relevant to quote theDFebruary 2020 Report of the Insolvency Law Committee, which notesas under:

“8.2 The moratorium under Section 14 is intended to keep “thecorporate debtor’s assets together during the insolvency resolutionprocess and facilitating orderly completion of the processesEenvisaged during the insolvency resolution process and ensuringthat the company may continue as a going concern while thecreditors take a view on resolution of default.” Keeping thecorporate debtor running as a going concern during the CIRPhelps in achieving resolution as a going concern as well, which isFlikely to maximize value for all stakeholders. In other jurisdictionstoo, a moratorium may be put in place on the advent of formalinsolvency proceedings, including liquidation and reorganizationproceedings. The UNCITRAL Guide notes that a moratorium iscritical during reorganization proceedings since it “facilitates thecontinued operation of the business and allows the debtor aGbreathing space to organize its affairs, time for preparation andapproval of a reorganization plan and for other steps such asshedding unprofitable activities and onerous contracts, whereappropriate.”

From the above, it can be seen that one of the motivations ofHimposing a moratorium is for Section 14(1)(a), (b), and (c) of the IBC to form a shield that protects pecuniary attacks against the CorporateDebtor. This is done in order to provide the Corporate Debtor withbreathing space, to allow it to continue as a going concern and rehabilitateitself. Any contrary interpretation would crack this shield and wouldhave adverse consequences on the objective sought to be achieved.

37. Even if a company goes into liquidation, a moratorium continuesin terms of Section 33(5) of the IBC which reads as under:

33 (5) - Subject to section 52, when a liquidation order has beenpassed, no suit or other legal proceeding shall be instituted by oragainst the corporate debtor:

Provided that a suit or other legal proceeding may be instituted bythe liquidator, on behalf of the corporate debtor, with the priorapproval of the Adjudicating Authority.

38. We may note that the IBC, being the more recent statute,clearly overrides the Customs Act. This is clearly made out by a readingof Section 142A of the Customs Act. The aforesaid provision notes thatthe Custom Authorities would have first charge on the assets of anassessee under the Customs Act, except with respect to cases underSection 529A of Companies Act 1956, Recovery of Debts Due to Banksand Financial Institutions Act 1993, Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest Act, 2002 andthe IBC, 2016. Accordingly, such an exception created under the CustomsAct is duly acknowledged under Section 238 of the IBC as well.Additionally, we may note that Section 238 of the IBC clearly overridesany provision of law which is inconsistent with the IBC. Section 238 ofIBC provides as under:

238. Provisions of this Code to override other laws- The provisions of this Code shall have effect, notwithstandinganything inconsistent therewith contained in any other law for thetime being in force or any instrument having effect by virtue ofany such law.

39. The NCLAT, while playing down the effect of Section 142Aof the Customs Act and Section 238 of the IBC, has held that the CustomsAct is a complete code in itself and no person can seek removal ofgoods from the warehouse without paying customs duty. The NCLATrelies on the judgment in Collector of Customs v. Dytron (India) Ltd., A

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A1999 ELT 342 Cal., by the High Court of Calcutta, which laid down thatcustoms duty carry first charge even during the insolvency process underSection 529 and 530 of Companies Act, 1956. However, reliance on thesaid precedent is not appropriate as the NCLAT has failed to notice thatsuch interpretation has been legislatively overruled by the inclusion ofSection 142A under the Customs Act, through Section 51 of the FinanceBAct of 2011.

40. From the above, it is to be noted that the Customs Act and theIBC act in their own spheres. In case of any conflict, the IBC overridesthe Customs Act. In present context, this Court has to ascertain as towhether there is a conflict in the operation of two different statutes inCthe given circumstances. As the first effort, this Court is mandated toharmoniously read the two legislations, unless this Court finds a clearconflict in its operation.

41. At the cost of repetition, we may note that the demand noticesissued by the respondent are plainly in the teeth of Section 14 of the IBCDas they were issued after the initiation of the CIRP proceedings.Moratorium under Section 14 of the IBC was imposed when insolvencyproceedings were initiated on 01.08.2017. The first notice sent by therespondent authority was on 29.03.2019. Further, when insolvencyresolution failed and the liquidation process began, the NCLT passed anEorder on 25.04.2019 imposing moratorium under Section 33(5) of theIBC. It is only after this order that the respondent issued a notice underSection 72 of the Customs Act against the Corporate Debtor. The variousdemand notices have therefore clearly been issued by the respondentafter the initiation of the insolvency proceedings, with some notices issuedeven after the liquidation moratorium was imposed.F

42. We are of the clear opinion that the demand notices to seekenforcement of custom dues during the moratorium period would clearlyviolate the provisions of Sections 14 or 33(5) of the IBC, as the casemay be. This is because the demand notices are an initiation of legalproceedings against the Corporate Debtor. However, the above analysisGwould not be complete unless this Court examines the extent of powerswhich the respondent authority can exercise during the moratorium periodunder the IBC.

43. In the above context, the judgment of this Court inS.V.Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, is extremelyH

SUNDARESH BHATT, LIQUIDATOR OF ABG SHIPYARD v. CENTRALBOARD OF INDIRECT TAXES AND CUSTOMS [N. V. RAMANA, CJI]

relevant. In that case, this Court, while expounding the interplay of Section446 of the Companies Act 1956 (bankruptcy provision) with the IncomeTax Act,1961, held as follows:

“7. …Looking at the legislative history and the scheme of theIndian Companies Act, particularly the language of Section 446,read as a whole, it appears to us that the expression “other legalproceeding” in sub-section (1) and the expression “legalproceeding” in sub-section (2) convey the same sense and theproceedings in both the sub-sections must be such as canappropriately be dealt with by the winding up court. The IncomeTax Act is, in our opinion, a complete code and it is particularly sowith respect to the assessment and re-assessment of income taxwith which alone we are concerned in the present case. The factthat after the amount of tax payable by an assessee has beendetermined or quantified its realisation from a company in liquidationis governed by the Act because the income tax payable also beinga debt has to rank pari passu with other debts due from the companydoes not mean that the assessment proceedings for computingthe amount of tax must be held to be such other legal proceedingsas can only be started or continued with the leave of the liquidationcourt under Section 446 of the Act. The liquidation court, in ouropinion, cannot perform the functions of Income Tax Officerswhile assessing the amount of tax payable by the assessees evenif the assessee be the company which is being wound up by theCourt. The orders made by the Income Tax Officer in the courseof assessment or re-assessment proceedings are subject to appealto the higher hierarchy under the Income Tax Act. There are alsoprovisions for reference to the High Court and for appeals fromthe decisions of the High Court to the Supreme Court and thenthere are provisions for revision by the Commissioner of IncomeTax. It would lead to anomalous consequences if the winding upcourt were to be held empowered to transfer the assessmentproceedings to itself and assess the company to income tax. Theargument on behalf of the appellant by Shri Desai is that the windingup court is empowered in its discretion to decline to transfer theassessment proceedings in a given case but the power on theplain language of Section 446 of the Act must be held to vest inthat court to be exercised only if considered expedient. We arenot impressed by this argument. The language of Section 446

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must be so construed as to eliminate such startling consequencesas investing the winding up court with the powers of an IncomeTax Officer conferred on him by the Income Tax Act, because inour view the legislature could not have intended such a result.

8. The argument that the proceedings for assessment or re-Bassessment of a company which is being wound up can only bestarted 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 whichthe liquidation court should be vested with the power to stopassessment proceedings for determining the amount of tax payableCby the company which is being wound up. The liquidation courtwould have full power to scrutinise the claim of the revenue afterincome tax has been determined and its payment demanded fromthe liquidator. It would be open to the liquidation court then todecide how far under the law the amount of income tax determinedDby the Department should be accepted as a lawful liability on thefunds of the company in liquidation. At that stage the winding upcourt can fully safeguard the interests of the company and itscreditors under the Act. Incidentally, it may be pointed out that atthe Bar no English decision was brought to our notice under whichthe assessment proceedings were held to be controlled by theEwinding up court. On the view that we have taken, the decisionsin the case of Seth Spinning Mills Ltd., (In Liquidation) (1962)46 ITR 193 (Punj) (Supra) and the Mysore Spun Silk MillsLtd., (In Liquidation) (1968) 68 ITR 295 (Mys) (supra) do notseem to lay down the correct rule of law that the Income TaxFOfficers must obtain leave of the winding up court for commencingor continuing assessment or re-assessment proceedings.”

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44. Therefore, this Court held that the authorities can only takesteps to determine the tax, interest, fines or any penalty which is due.However, the authority cannot enforce a claim for recovery or levy ofGinterest on the tax due during the period of moratorium. We are of theopinion that the above ratio squarely applies to the interplay betweenthe IBC and the Customs Act in this context.

45. From the above discussion, we hold that the respondent couldonly initiate assessment or re-assessment of the duties and other levies.HThey cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 or 33(5) of the IBC. The interim resolutionprofessional, resolution professional or the liquidator, as the case maybe, has an obligation to ensure that assessment is legal and he has beenprovided with sufficient power to question any assessment, if he findsthe same to be excessive.

46. There is another aspect of this case that needs to be highlightedto portray the inconsistency of the Customs Act vis-à-vis the IBC duringthe moratorium period. In the present case, the demand notice dated11.07.2019 was issued by the respondent under Section 72 of the CustomsAct, in clear breach of the moratorium imposed under Section 33(5) ofthe IBC. Issuing a notice under Section 72 of the Customs Act for non-payment of customs duty falls squarely within the ambit of initiatinglegal proceedings against a Corporate Debtor. Even under the liquidationprocess, the liquidator is given the responsibility to secure assets andgoods of the Corporate Debtor under Section 35(1)(b) of IBC.

47. As laid down earlier, the Customs Act and IBC can be read ina harmonious manner wherein authorities under the Customs Act havea limited jurisdiction to determine the quantum of operational debt – inthis case, the customs duty – in order to stake claim in terms of Section53 of the IBC before the liquidator. However, the respondent does nothave the power to execute its claim beyond the ambit of Section 53 ofthe IBC. Such harmonious construction would be in line with the rulingin Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209,wherein a balance was struck by this Court between the jurisdiction ofthe NCLT under the IBC and the potential encroachment on the legitimatejurisdiction of other authorities.

48. However, it appears to us that in the impugned order, theNCLAT has misinterpreted the aforesaid judgment of this Court in GujratUrja Vikas Nigam Case (supra) and held as follows:

“7.16 Thus, it is clear that NCLT and NCLAT cannot usurp thelegitimate jurisdiction of other Courts, Tribunals and fora whenthe dispute does not arise solely from or relating to the insolvencyof the corporate debtor. In the instant case, the Corporate Debtorhad abandoned the imported goods in the Customs warehousesfor several years and failed to pay the import duty and other chargesand had not taken any steps to take possession of those goods forseveral years. Therefore, the importer had lost his right to the A

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Aimported goods. Consequently, Customs Authorities are fullyempowered under Section 72 of the Act to sell those goods torecover the Government dues. Liquidator has no right to take intopossession over those goods for which the Corporate Debtorstitle is deemed relinquished by implication of law. Even beforeinitiating the Corporate Insolvency Resolution Process, theBCorporate Debtor company could not have secured the possessionof the imported goods except by paying the Customs duty.Resolution Professional/liquidator, who virtually represents thecompany, cannot stand on a better footing than the CorporateDebtor itself.”C

49. Such interpretation clearly ignores the fact that there was no“abandonment of goods” which would authorize the Customs Authoritiesto initiate the adjudicatory process to transfer title to themselves. Beforeany goods can be declared to have been “abandoned”, the same mustbe adjudged by some authority after due notice. The position cannot beDassumed or deemed. In the case at hand, no such adjudication or noticehas been placed on record to suggest that such abandonment of thewarehoused goods had taken place prior to the imposition of themoratorium.

50. The NCLAT, by deciding the question of passing of title fromEthe Corporate Debtor to the respondent authority, has clearly ignoredthe mandate of Section 72(2) of the Customs Act relating to sale. Thisinterpretation of the NCLAT clearly ignores the effects of the moratoriumunder Sections 14 and 33(5) of the IBC. The fact is that the duty demandnotice and notice under Section 72(2) of the Customs Act, were issuedduring the moratorium period, which has been completely ignored byFNCLAT and has resulted in rendering the moratorium otiose.

51. The interpretation provided by the NCLAT, regarding thedeemed transfer of title of the goods from the assessee to the CustomsAuthority under Section 72 of the Customs Act, would fly in the face ofSection 14 of the IBC, read with Sections 25 and 33(5). Moreover, suchGdeemed transfer cannot be countenanced in law as the same would bein breach of Article 300A of the Constitution, as properties are deemedto be transferred to the Customs Authority without there being adequatehearing or any adjudication of any form. Such an interpretation cannotbe accepted by this court.

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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 underRegulation 17 of IBBI Liquidation Process Regulation 2016 before theappellant/liquidator in order to stake claims for distribution of proceedsof sale in consonance with Section 53 of the IBC. The respondentauthority, does a U-turn on filing such claims and instead, unilaterallydecides to initiate recovery proceedings under Section 72(2) of theCustoms Act. Further, the Customs Authority bypasses even the noticeand adjudicatory requirements contemplated under Section 72(2) of theCustoms Act and takes the position that there is a deemed transfer oftitle with respect to the assets as customs duty and other levies were notduly paid. Such a change in stance is clearly an afterthought, withoutthere being any basis in law to by-pass the specialized procedure laiddown under the IBC.

53. For the sake of clarity following questions, may be answeredas under:

a)Whether the provisions of the IBC would prevail overthe Customs Act, and if so, to what extent?

The IBC would prevail over The Customs Act, to the extentthat once moratorium is imposed in terms of Sections 14 or33(5) of the IBC as the case may be, the respondentauthority only has a limited jurisdiction to assess/determinethe quantum of customs duty and other levies. Therespondent authority does not have the power to initiaterecovery of dues by means of sale/confiscation, as providedunder the Customs Act.

b)Whether the respondent could claim title over thegoods and issue notice to sell the goods in terms ofthe Customs Act when the liquidation process hasbeen initiated?

answered in negative.

54. On the basis of the above discussions, following are ourconclusions:

i)Once moratorium is imposed in terms of Sections 14 or33(5) of the IBC as the case may be, the respondentauthority only has a limited jurisdiction to assess/determine A

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the quantum of customs duty and other levies. Therespondent authority does not have the power to initiaterecovery of dues by means of sale/confiscation, as providedunder the Customs Act.

ii)After such assessment, the respondent authority has toBsubmit its claims (concerning customs dues/operationaldebt) in terms of the procedure laid down, in strictcompliance of the time periods prescribed under the IBC,before the adjudicating authority.

iii)In any case, the IRP/RP/liquidator can immediately secureCgoods from the respondent authority to be dealt withappropriately, in terms of the IBC.

55. Resultantly, we allow the appeal and set aside the impugnedorder and judgment of the NCLAT. There shall be no orders as to costs.

DDivya Pandey

(Assisted by : Roopanshi Virang, LCRA)

Appeal allowed.

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