SC holds in case of conflict The Insolvency and Bankruptcy Code takes precedence over the Customs Act

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Press Trust of India

New Delhi: The Supreme Court on Friday ruled that the Insolvency and Bankruptcy Code (IBC) will prevail over the Customs Act, as once moratorium proceedings are initiated under the code, the Customs authority will not does not have the power to initiate recovery actions for the contributions of the debtor company.

The high court also ruled that the customs authority cannot claim title to the goods and issue a notice of sale of the goods according to customs law when the liquidation process has been initiated against the debtor company.

A bench of Chief Justice NV Ramana and Justices JK Maheshwari and Hima Kohli set aside an order of the National Company Law Appellate Tribunal (NCLAT) in which it allowed the appeal of the Central Board of Indirect Taxes and Customs (CBIT-C) against the NCLT verdict ordering the release of certain goods from bonded warehouses without payment of customs duties and other levies.

The bench said: “It should be noted that the Customs Act and the IBC act within their respective domains, and in the event of a conflict, the IBC takes precedence over the Customs Act.”

The bench, after analyzing the IBC and the Customs Act, concluded that “the IBC would prevail over the Customs Act, to the extent that once the moratorium is imposed under Sections 14 or 33(5) of the CBI, as the case may be, the respondent authority (CBI-C) has only limited jurisdiction to assess/determine the amount of customs duties and other levies. to initiate the collection of duties by way of sale/confiscation, as provided for in the Customs Act”.

The higher court was hearing an appeal filed by Sundaresh Bhatt, the liquidator of ABG shipyard (debtor company) was in the shipbuilding business before the opening of insolvency proceedings against it.

On August 1, 2017, the National Company Law Tribunal (NCLT) in Ahmedabad issued an order initiating the Corporate Insolvency Resolution Process (CIRP) against the debtor company and appointed Bhatt as the the provisional resolution.

In the same order, the NCLT also declared a moratorium under section 13(1)(a) of the IBC.

On August 21, 2017, Bhatt notified customs authorities of the opening of the CIRP and requested custody of the company’s warehoused goods, and instructed them not to sell or auction them.

However, on March 29, 2019, the customs authority first issued a notice to the debtor company regarding non-compliance with export obligations under the EPCG license demanding customs duty of Rs. 17, 13,989 with interest. From April 2, 2019 to April 7, 2019, the authority issued five different formal notices to the debtor company regarding non-compliance with export obligations under different EPCG licenses for different amounts.

The bench held that once a moratorium is imposed under IBC Sections 14 or 33(5), as the case may be, the defending authority has only limited jurisdiction to assess/determine the amount of customs duties and other levies.

“The defending authority does not have the power to initiate the collection of duties by way of sale/confiscation as provided for in the Customs Act,” she said.

The high court indicated that after this assessment, the defendant authority must submit its claims (concerning customs duties/operating debt) according to the procedure provided, in strict compliance with the time limits prescribed by the IBC. , before the contracting authority (CNLT).

The bench authorized the liquidator (Bhatt) to immediately obtain goods from the customs authority for proper handling, in terms of IBC, and allowed his appeal against the NCLAT.

said the bench. “We can note that the IBC, being the most recent law, clearly trumps the Customs Act. This is clear from a reading of Section 142A of the Customs Act. The above-mentioned provision notes that customs authorities would have the first charge on the assets of a person assessed under the Customs Act except in respect of cases falling under… the Companies Act 1956, the 1993 on the recovery of debts owed to banks and financial institutions, the SARFAESI law, 2002, and the CIB, 2016”.

He stated that accordingly, such an exception created under the Customs Act is also duly recognized under Section 238 of the IBC, and further, “we may note that Section 238 of the IBC clearly prevails over any provision of the law that is inconsistent with the IBC”. ”.

“At the cost of repetition, we can note that the formal notices issued by the respondent are clearly within the teeth of Article 14 of the IBC because they were issued after the initiation of the CIRP procedure. A moratorium under Section 14 of the IBC was imposed upon the commencement of insolvency proceedings on August 1, 2017,” he said.

The bench said it is clear that notices to seek enforcement of customs duties during the period of the moratorium would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be.

“This is because the formal notices constitute the opening of legal proceedings against the debtor company,” said the high court.


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