IBC prevails over Customs Act once moratorium is executed: Supreme Court

The Supreme Court on Friday held that provisions of the Insolvency and Bankruptcy Code (IBC) would prevail over the Customs Act once a moratorium is executed [Sundaresh Bhatt vs CBITC].

A Bench of Chief Justice of India NV Ramana, and Justices JK Maheshwari and Hima Kohli also held that the Central Board of Indirect Taxes and Customs (CBIC) has limited authority to determine customs and could not initiate recovery of dues in such cases.

“The IBC would prevail over The Customs Act, to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case may be, the respondent authority only has 35 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 order of the National Company Law Appellate Tribunal (NCLAT) under challenge had held that the liquidator’s intent to possess uncleared goods from the customs warehouses without upfront payment of customs duty was against the provisions of the Customs Act.

The NCLAT had concluded, in allowing the appeals of an order the National Company Law Tribunal at Ahmedabad, that the assets lying in the Customs bonded warehouses could not be considered assets of the corporate debtor.

The NCLT had considered Section 238 of the IBC and held that its non­obstante clause has an overriding effect on proceedings under the Customs Act.

Senior Advocate Arvind Datar, appearing for the appellant-liquidator, contended that by submitting claims under Section 38 of the IBC, the respondent had elected to subject its dues to be governed by the IBC.

The corporate debtor is and remains the owners of the goods, he added.

The respondent could not have exercised rights under the Customs Act, as the relevant statutory charge is expressly subordinate to the IBC, it was argued.

Additional Solicitor General (ASG) KM Nataraj, appearing for the respondents, argued that concerned goods were never claimed after being imported, and abandoned without paying the necessary import levies.

The corporate debtor had never cleared bills of entry for part of the goods, and so the warehouse's assets could not be claimed, the ASG argued.

The Bench noted that there were two questions of law before it:

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

b) 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 Bench at the outset noted that the demand notices issued by the respondent were "plainly in the teeth of Section 14 of the IBC as they were issued after the initiation of the CIRP proceedings ... [and] clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be".

Therefore, the respondent could not have claimed title over the goods and issued notice to sell the goods in terms of the Customs Act, when the liquidation process had already been initiated, it was held.

After the resolution professional's assessment, the respondent authority has to submit its claims concerning customs dues/operational debt strictly in terms of the procedure laid down in the IBC before the adjudicating authority, the Bench ruled.

"In any case, the IRP/RP/liquidator can immediately secure goods from the respondent authority to be dealt with appropriately, in terms of the IBC," the Court said.

[Read Judgment]