Supreme Court of India
Citation: IBCLaw.in 103 SC
Brief Facts: The case arose from the liquidation of ABG Shipyard Ltd., where Mr. Sundaresh Bhatt was appointed as the liquidator. The Central Board of Indirect Taxes and Customs (CBIC) had claims against ABG Shipyard regarding:
– Customs duty
– Interest
– Penalties
– Other dues under the Customs Act, 1962
- The key issue was whether the CBIC could claim its dues outside the waterfall mechanism prescribed under Section 53 of the Insolvency and Bankruptcy Code (IBC), 2016.
- The CBIC argued that Section 142A of the Customs Act gave them first charge over the company’s properties, which should take precedence over the distribution mechanism under the IBC.
- The liquidator contended that all claims, including government dues, must follow the waterfall mechanism under Section 53 of the IBC.
Legal Questions Before the Court
- Can the Customs Act, 1962 provisions, particularly Section 142A, override the distribution mechanism prescribed under Section 53 of the IBC?
- Whether customs authorities can claim title over goods subject to customs duty outside the liquidation process?
Supreme Court’s Judgment: The Supreme Court delivered its judgment on August 26, 2022, making the following key determinations:
Primary Findings: The IBC will prevail over the Customs Act for distribution of assets during liquidation:
– The waterfall mechanism under Section 53 of IBC cannot be overridden by Section 142A of the Customs Act
– Government dues under the Customs Act must be claimed through the liquidation process
Regarding the status of goods under customs control:
– Customs authorities cannot claim title over goods merely because customs duty hasn’t been paid
– They only have a statutory charge over the goods
– This charge must be enforced through the IBC’s liquidation process
Key Principles Established
Supremacy of IBC: The Court affirmed that the IBC is a complete code in itself and its provisions, including the distribution mechanism, will override other laws in case of conflict.
Nature of Customs Department’s Rights:
– Customs authorities are operational creditors under the IBC
– They must submit their claims to the liquidator like other creditors
– They cannot act outside the IBC framework to recover their dues
Treatment of Goods:
– Goods under customs control form part of the liquidation estate
– The liquidator has the right to take possession of these goods
– Customs authorities must release such goods to the liquidator upon request
Significance of the Judgment
- Clarifies the relationship between IBC and other revenue laws
- Strengthens the primacy of IBC in corporate insolvency matters
- Ensures orderly and equitable distribution of assets during liquidation
- Prevents government authorities from claiming preferential treatment outside the IBC framework
- Provides certainty to stakeholders about the treatment of customs dues in liquidation
The judgment serves as a significant precedent in establishing the supremacy of the IBC’s distribution mechanism over other laws claiming special rights or privileges in corporate liquidation proceedings.