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The Supreme Court vide its Judgment dated 26.08.2022 in the matter of  Sundaresh Bhat, Liquidator of ABG Shipyard Ltd. Vs. Central Board of Indirect Taxes & Customs 2022 SCC OnLine SC 1162 had given a conclusive decision that IBC would prevail over the Customs Act to the extent that once moratorium is imposed in terms of the provisions of Sections 14 or
Section 33(5) of the IBC, the Customs Authority shall only have a limited jurisdiction to assess/determine the quantum of customs duty and it shall not have the power to initiate recovery of dues by means of sale/confiscation. The Supreme Court had further given a conclusive decision that the Customs Authorities could not claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process under the Insolvency & Bankruptcy Code has been initiated. 

            In the case in hand, the Customs Authorities had the warehoused goods of the Corporate Debtor, which was being sold by it as per the provisions of the Customs Act in view of non-payment of debts by the Corporate Debtor.  The process of sale was halted and subsequently the matter had been halted by NCLT viz. the Adjudicating Authority but the said decision was reversed by the NCLAT and thereinafter on challenge made by the Liquidator of ABG Shipyard, the Appeal of the Liquidator was allowed and the Central Board of Indirect Taxes & Customs was directed to release the secured goods from the Customs Authorities to be dealt with appropriately in terms of the Insolvency & Bankruptcy Code.

            The issue which is critical in the matter and were the of consideration is that the Hon’ble Supreme Court was of the view that the Insolvency & Bankruptcy Code came into force from the year 2016 whereby there was an amalgam of all the insolvency laws.  The Insolvency & Bankruptcy Code in Section 14 dealt with the Moratorium during the Corporate Insolvency Resolution Process of the Company and Moratorium applicable during the liquidation in terms of Section 33(5) of the Insolvency & Bankruptcy Code.  The idea was to protect the assets of the Company from getting filtrated so that ultimately the assets could be utilized in a proper manner without being misutilized in any manner whatsoever or getting diverted.  The Supreme Court in such view of the matter had held that the provisions of Section 142A of the Customs Act which entails that Customs Authorities would have first charge on the assets of an assessee under the Customs Act except with respect to the cases under Section 529A of Companies Act, 1956 and Recovery of Debts due to Banks  & Financial Institutions, 1993, Securitization and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and the Insolvency & Bankruptcy Code, 2016. Thus, an exception was carved under the Customs Act in which duly acknowledged under Section 238 of the Insolvency & Bankruptcy Code as well and accordingly in view of the overriding provisions of the Insolvency & Bankruptcy Code over the Customs Act, the Court was of the view that the Insolvency & Bankruptcy Code shall override the Customs Act. The relevant Section 142A of the Customs Act is reproduced herein below:-

142A. Liability under Act to be first charge.— Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993), and the Securitization and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (54 of 2002) and the Insolvency and Bankruptcy Code, 2016 (31 of 2016) be the first charge on the property of the assessee or the person, as the case may be.

            In such view of the matter where the enactment itself provided that the first charge of the Customs Department shall get evaporation no longer sustained in the case where the Company’s matter pending under the provisions of Insolvency & Bankruptcy Code, the charge on the assets which was otherwise provided in law had been given a go-bye.

            Resultantly, the impact of amendment to Section 142A read with the provisions of Section 238 of Insolvency & Bankruptcy Code and also in line with the Moratorium entailed in Section 14 and 33(5) of the Insolvency & Bankruptcy Code has unequivocally led to situation where by the Customs Authorities lose the legal sanctity of the claim of having first charge on the assets of a defaulting entity.  In such view of the matter, the direction issued by the Supreme Court for release of the properties from the Custom Bonded Warehouse for the onward process of sale by the Liquidator was of course a justified decision in accordance with the provisions of law.

            However, what is critical to be seen is as to whether the provisions of the Insolvency & Bankruptcy Code stipulated anywhere as to whether the first charge of the Customs Department shall be given a go-bye. A bare perusal of the provisions of the Insolvency & Bankruptcy Code read with the provisions of the Customs Act makes it absolutely clear that the first charge of the Customs Department does not get nullified, the only window which is available is the mechanism of sale of the assets by the Liquidator in the given set of circumstances where the proceedings are pending under the provisions of the Insolvency & Bankruptcy Code. 

            So, the question which emerges and which may require an answer is ultimately the position of the first charge and how it has to be dealt with especially in the wake of the Judgment of the Supreme Court in the matter of Rainbow Paper Ltd. (CITATION).  The Judgment of the Supreme Court in the Rainbow Paper Ltd. (supra) was that where the first charge is statutorily provided for the concerned party has to be treated as a secured creditor.

            In this situation, what has to be now seen and examined is that while giving the free hand to a Resolution Professional or a Liquidator to proceed ahead with the sale of the goods lying in the Custom Bonded Warehouses after getting them released in view of the overriding  provisions of the Insolvency & Bankruptcy Code, whether the Customs Authorities shall still continue to exercise the first charge, the answer in such a case is definitely in affirmative especially in the matter of Sundaresh Bhat Vs Central Board of Indirect Taxes & Customs, the Supreme Court has only decided the provisions of the Insolvency & Bankruptcy Code prevailing over the Customs Act.  However, the issue regarding the position of the Customs Authorities as a secured creditor and having a priority right has not been considered. Further, it is also important to mention that the Insolvency & Bankruptcy Code nowhere forbears the Customs Authorities from having the first charge and accordingly there is no conflict in the provisions of the Insolvency & Bankruptcy Code and Customs Authorities, which may disturb its right as a first charge holder.  To buttress the situation, the Judgment of the Supreme Court in the matter of Rainbow Paper (supra) is indeed important because the distribution of the claim amount to the creditors and those who are statutorily the first charge holders has been dealt with in extenso in the Judgment of Rainbow Paper (supra).

            END RESULT – In such view of the matter, the provisions of the Insolvency & Bankruptcy Code shall undoubtedly prevail, however, the Customs Department can claim its right as a first charge holder and accordingly, in view of the statutory provision of law can certainly to proceed to claim its right as being the first charge holder and legally entitled in law to seek the prioritization of its claim in comparison to the other financial creditors. Had it been stipulated in the provisions of Section 142A of the Customs Act that the first charge is in conflict with the provisions of Insolvency & Bankruptcy Code and that Insolvency & Bankruptcy Code specifically states that the Customs Department cannot claim the first charge in any manner whatsoever that the Customs Authorities would have lost their right. To put the matter in its correct perspective, while the assets can be handed over and the Liquidator at the behest of the Liquidator or the Resolution Professional, as the case may be, in matters of Insolvency & Bankruptcy Code, however, undoubtedly the Customs Department shall never be losing their right of claiming their first charge as it is not in conflict with any law for the time being in force.  Thus, a harmonious interpretation of the Insolvency & Bankruptcy Code, the Customs Act and the interpretative provisions in view of the Rainbow Paper (supra) gives an unequivocal right to Customs Authorities to claim that their first charge shall not be diluted in any manner whatsoever except that they have to temporarily divest control and thereafter, raise a claim for payment of their dues pursuant to the onward sale of the assets by being given the right of priority as per the statute, which has not been disturbed.