A moratorium prohibits proceedings for the collection of customs duties against a debtor company: Supreme Court – Insolvency/bankruptcy

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INTRODUCTION

In its judgment of August 26, 2022, in the case of Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, Civil Appeal No. 7667/2021, the 3-judge panel of the Supreme Court (SC) held that the pending insolvency proceedings and the imposition of a moratorium to a person assessed under section 14 of the Insolvency and Bankruptcy Code (“Code”), limit the powers available to customs authorities under the Customs Act 1962 (“Customs Act”) to duty collection duty of that assessee. The SC held that the scope of proceedings under the Customs Act during the extension of the moratorium is limited only to the determination of the amount of customs duties.

CONTEXT

  • The debtor company (ABG shipyard) engaged in the import of shipbuilding components and materials and the export of completed ships. The imported goods were stored in bonded warehouses in Gujarat and container freight stations in Maharashtra, and the debtor company had made use of the Capital Goods Export Promotion Scheme (“EPCG Scheme”) and obtained a license under such program (“EPCG License”), with respect to such warehoused goods.

  • The National Company Law Tribunal, Ahmedabad Bench (“NCLT”) issued an order dated August 1, 2017 initiating the Corporate Insolvency Resolution (“CIRP”) process of the debtor company, appointed a professional Interim Resolution (“IRP”) and imposed a moratorium under Section 14 of the Code.

  • The IRP (appellant) informed the respondent of the debtor company’s pending CIRP, sought to take custody of the stored goods and further instructed the respondent not to auction or dispose of said goods .

  • The debtor company began liquidation proceedings on April 25, 2019, which ended the moratorium under Article 14 of the Code, but a moratorium in the liquidation proceedings under Article 33 (5) of the Code has been hired.

  • The defendant issued a formal notice to the debtor company under Section 72(1) of the Customs Act in the amount of INR 763,12,72,645 relating to 2531 entry invoices during the period of the moratorium in the liquidation procedure. At the same time, the Respondent also filed its claims before the Appellant under the provisions of the Code.

  • The appellant subsequently filed a motion with the NCLT under section 60(5) of the Code, requesting that directions be given to the respondent for the release of the warehoused goods belonging to the debtor company. The appellant claimed custody of the stored goods, as liquidator of the debtor company.

  • The NCLT’s Vacancy Order dated February 25, 2020 granted the Appellant’s request and ordered the Respondent, among other things, to allow the Appellant to take custody of the stored goods without any condition. , obstacle and/or payment of customs duties. The NCLT held that the provisions of the Code had an overriding effect on the Customs Act and that government fees should be dealt with in accordance with the cascading mechanism prescribed under Section 53 of the Code.

  • The NCLT also prevented the Respondent from alienating, disposing of or appropriating the warehoused goods of the debtor company, while leaving the Respondent free to lodge its claims with the Appellant with regard to the customs duties payable, and which claims had to be dealt with in accordance with the law.

  • Defendant appealed to the National Company Law Appellate Tribunal (“NCLAT”) challenging the NCLT order, which was decided on November 22, 2021 (i.e. the order challenged before the SC). The NCLAT quashed the NCLT’s order, held that the debtor company had relinquished ownership of the warehoused goods under sections 48 and 72 of the Customs Act, and ordered that the warehoused goods be dealt with by the authorities customs under the provisions of the Customs Act.

ISSUE TO CONSIDER

  • Would the provisions of the Code prevail over the Customs Act and, if so, to what extent?

  • Could the customs authorities claim ownership of the imported goods and sell the same goods under the Customs Act during the liquidation proceedings of the debtor company?

WHAT THE SUPREME COURT DECIDED

  • The SC quashed the impugned order of the NCLAT and held that the provisions of the Code had an overriding effect over the provisions of the Customs Act under section 238 of the Code. The SC interpreted the provisions of the Code and the Customs Act harmoniously and, therefore, held that during the moratorium period, customs authorities would have only limited jurisdiction to determine the amount of customs duties. customs, without incurring the collection of duties.

  • Customs authorities can lodge their complaints with the resolution professional or the liquidator (as the case may be), and the complaints would be dealt with in accordance with the cascading mechanism provided for in Article 53 of the Code.

  • No notice of application under the Customs Act may be issued by customs authorities to the assessed once a moratorium under Section 14 or Section 33(5) of the Code is imposed .

  • There can be no deemed transfer of ownership of the goods from the person assessed to the Customs Authority under Section 72 of the Customs Act, as this violates the mandate of Section 14 read with Sections 25 and 33 (5) of the Code as well as Section 300-A of the Constitution of India, 1950 (Constitution).


  • CONCLUSION


  • The SC circumscribed the jurisdiction of customs authorities under the Customs Act from the Code, which is limited only to determining the amount of customs duty payable by the person being assessed.

  • The judgment protects the interest of the debtor company as well as the income, by shielding the debtor company from collection proceedings under the Customs Act, and at the same time, allowing customs authorities to file claims with the trader of the resolution with regard to unpaid customs duties.

  • The SC has clarified the scope and scope of the moratorium imposed under the Code. It was held that the intention of the legislator in adopting moratorium provisions was to ensure that parallel proceedings are not initiated and to avoid contradictory results during the insolvency process.

The contents of this document do not necessarily reflect the views/positions of Khaitan & Co but remain solely those of the authors. For any other questions or follow-up, please contact Khaitan & Co at [email protected]

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