Introduction
On 26.08.2022, the Supreme Court (‘SC’) delivered a seminal verdict in the case of Sundresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs[i], wherein the Apex Court held that the Insolvency and Bankruptcy Code, 2016 (‘IBC’) would prevail over the Customs Act, 1962 (‘1962 Act’) to the extent that once moratorium is imposed in terms of ss. 14 or 33(5) of the IBC as the case may be, the Central Board of Indirect Taxes and Customs (‘CBIC’) only has a limited jurisdiction to assess/determine the quantum of customs duty and other levies as it does not have the power to initiate the recovery of dues by means of sale/confiscation, as provided under the 1962 Act.
Brief Facts
ABG Shipyard, the Corporate Debtor (‘CD’), was in the business of shipbuilding prior to the initiation of the corporate insolvency resolution process (‘CIRP’) under the IBC against it. The CD used to import various goods for the purpose of constructing ships and the finished product was exported. Some of these goods were stored by the CD in the Customs Bonded Warehouses in Gujarat and Container Freight Stations in Maharashtra. The CD took advantage of the Export Promotions Capital Goods Scheme and obtained a license thereby.
CIRP was initiated against the CD in August 2017, and subsequently, liquidation proceedings were initiated against the CD in April 2019, where the Appellant was appointed as the liquidator. Accordingly, the Appellant informed CBIC that liquidation proceedings had commenced against the CD and that the goods were to be released to the Appellant.
Due to inaction, the Appellant moved the National Company Law Tribunal (‘NCLT’), seeking direction against CBIC to release the warehoused goods belonging to the CD. The NCLT passed favourable directions and allowed the warehoused goods to be released. Subsequently, the Appellant sold the warehoused goods in Surat.
Thereafter, the National Company Law Appellate Tribunal (‘NCLAT’) allowed the appeal filed by CBIC and held that the goods lying in custom warehouses were not assets of the CD. It further held that the 1962 Act is a complete code and the warehoused goods cannot be released until the payment of customs dues. The NCLAT observed that by not filing the bills of entry, the CD had relinquished its ownership, and the CD was deemed to have lost its title by action of ss. 48 and 72 of the 1962 Act. Aggrieved by this order, the Appellant approached the SC.
Issues
Whether the provisions of the IBC would prevail over the 1962 Act, and if so, to what extent?
Whether CBIC could claim title over the goods and issue notice to sell the goods in terms of the 1962 Act when the liquidation process had already been initiated?
Decision
The SC allowed the appeal and set aside the order passed by the NCLAT. Having regard to the first issue, the NCLAT observed that when the insolvency process commences, the NCLT is mandated to declare a moratorium on the continuation or initiation of any coercive legal action against the CD. The motivation for imposing a moratorium is to form a shield that protects pecuniary attacks against the CD while providing the CD with some 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.
The NCLAT further noted that the IBC, being the more recent statute, clearly overrode the 1962 Act and that the same could be made out by reading s.142A of the 1962 Act. It was held that the 1962 Act and the IBC act in their own spheres, and in case of any conflict, the IBC overrides the 1962 Act. Resultantly, the demand notices to seek enforcement of custom dues during the moratorium period clearly violated ss. 14 or 33(5) of the IBC.
With regard to the second issue, the NCLAT held that before any goods could be declared to have been ‘abandoned,’ the same had to be adjudged by the competent authority after due notice and that the said position could not have been assumed or deemed. The NCLAT concluded that such deemed transfer could not be countenanced in law as the same would be in breach of a. 300A of the Indian Constitution, as the properties were deemed to be transferred to the Customs Authority without there being adequate hearing or any adjudication of any form.
Our Analysis
The SC has settled the law in this aspect after this judgment. Therefore, in any case, once the moratorium is imposed under ss. 14 or 33(5) of the IBC, the authorities have limited jurisdiction to assess the quantum of customs duty and other levies. Once such an assessment is made, the authorities must submit the claims (if any) in strict compliance with the procedure laid down in the IBC before the NCLT. Further, once the CIRP or liquidation has been initiated, then the Interim Resolution Professional / Resolution Professional / Liquidator can immediately secure goods from the authorities, as applicable, so that the goods may be dealt with appropriately as per the provisions of the IBC.
This judgment is one of those that addresses the situation when Courts encounter two conflicting statutes that govern the same subject matter. In such cases, the Courts generally strive to harmonize the provisions of both laws, seeking a balanced interpretation that allows both statutes to co-exist seamlessly. However, when irreconcilable conflicts persist, as did in the present case, the Courts accord precedence to the newer or more recent law over the older statute.
The rationale behind this approach lies in the presumption that the drafters of the more recent legislation were already aware of the existing laws. Consequently, they intentionally crafted the new law to sit well with the existing enactments. By prioritizing the most recent legislative expression, the Courts ensure legal continuity while respecting the evolving legislative intent.
End Note
[i] 2022 SCC OnLine SC 1101
Please find below the write-ups on where the IBC overrides other laws:
Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.