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Customs Act 0 – Supreme Court upholds the overriding effect of IBC

IBC 1; Customs Act 0
Supreme Court upholds the overriding effect of IBC

In a recent judgment in the case of ABG Shipyard1, the Supreme Court has decided an extremely relevant
question of law concerning the liquidation process under the Insolvency & Bankruptcy Code, 2016
(“IBC”).

The role of a Liquidator under IBC is in a sense quite simple and straight-forward, being to liquidate
the assets of the debtor and distribute the sale proceeds to the creditors. However, practically, taking
possession of assets of a debtor and undertaking sale, particularly in cases of large businesses with
spread out assets, can often get quite complex. One such complexity that was frequently arising was in
respect of sale of moveable assets of a debtor where dues of customs, ports, warehouse etc. were unpaid.

Given the grey areas of law involved, since several years, smaller disputes had broken out before
National Company Law Tribunals pan India (“NCLT”) and carried in Appeal before the National
Company Law Appellate Tribunal (“NCLAT”) where Liquidators appointed under the IBC were facing
a challenge in liquidating assets of the company in liquidation on account of unpaid custom and freight
dues in respect of the moveable assets lying at custom bonded warehouses and container freight stations.

In the case of ABG Shipyard, the NCLAT had given certain radical findings to the effect that (1) the
Customs Act has overriding effect on IBC and (2) the title in the asset lying at the bonded warehouse
vested with the Customs Authority on account of unpaid dues. Basis this, the NCLAT had prohibited
these assets from being treated as part of the liquidation estate and permitted the customs Authority to
sell/confiscate the goods in terms of process under the Customs Act.

Reversing the judgment of the NCLAT, the Supreme Court has given two clear findings – (1) The
provisions of IBC will override the provisions of the Customs Act; and (2) The title of the goods
continues to remain with the debtor in liquidation and the liquidator can secure goods and deal with
them under the provisions of IBC.

In giving the above findings, the Supreme Court has rightly reversed the Order of the NCLAT which
had effectively held that if customs duty was unpaid, the title of the goods vested with the Customs
Authority and not the Liquidator. Juxta posing the position under Section 142A of the Customs Act
with Section 238 of IBC, the Supreme Court has clarified that while generally the liability created under
the Customs Act has a first charge over the property of an assessee, this provision is overridden by the
provisions of IBC. Concluding its explicit findings, the Supreme Court has held that the course of action
available to the Customs Authority is to file a claim before the Resolution Professional / Liquidator and
the Liquidator is entitled to secure the goods so the same may be dealt with in terms of the provisions
of the IBC.

This judgment of the Supreme Court brings about the much-needed clarity on this issue as moveable
assets of significant value were often found to be lying at ports, freight stations. Not being permitted to
remove and liquidate the same was very concerning for stakeholders, particularly creditors such as
banks and financial institutions that have security interest over such assets.

The issue that is yet to be decided is whether such authorities including Customs, Port Trust etc. can be
treated as secured creditors by virtue of a statutory lien over the goods and if so, whether such lien
would rank above the charge of the existing lenders such as banks.

 

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