The overriding effect of IBC on the Central Board of Indirect Taxes and Customs – By A. K. Raja

The overriding effect of IBC on the Central Board of Indirect Taxes and Customs

Sundaresh Bhatt, Liquidator of ABG Shipyard Vs. The Central Board of Indirect Taxes and Customs
Reported at (2022) 103 SC

Authored by:
A.K.Raja, B.C.A.LL.B (HONS), GIP Student


A recent judgment overturning the order of the NCLAT New Delhi held that abandoned imported goods lying in the customs warehouses for several years can be considered a part of the corporate debtor’s (CD) assets.


ABG Shipyard’s “Corporate Debtor” worked in the shipbuilding industry. It used to regularly import various materials as part of its operations in order to build ships that would eventually be exported. The corporate debtor stored some of these items in custom-bonded warehouses in Gujarat and Maharashtra container freight stations. Bills of entry for warehousing were submitted on time. The corporate debtor also benefited from an Export Promotion Capital Goods Scheme (“EPCG Scheme”) and received an EPCG License for the warehousing of the goods under it. The CD took advantage of other related schemes/notifications, but did not pay the required customs duty.


A section-9 application was filed by ICICI Bank against the ABG Shipyard at Ahmedabad NCLT for the initiation of a corporate insolvency resolution process (CIRP). The corporate debtor was subject to the Corporate Insolvency Resolution Process (“CIRP”) after an order was issued by the National Company Law Tribunal (NCLT), Ahmedabad, on August 1, 2017, and the appellant was chosen to serve as the Interim Resolution Professional. A moratorium under IBC Section 13(1)(a) was also proclaimed by the NCLT in the same order.

On April 25, 2019, the NCLT issued an order launching the liquidation process against the Corporate Debtor in accordance with Section 33(2) of the IBC. According to the aforementioned order, the NCLT declared that the earlier moratorium imposed under Section 13(1)(a) of the IBC shall expire as a result of Section 14(4) of the IBC taking effect. However, a new directive prohibiting the initiation of any lawsuit by or against the Corporate Debtor was issued pursuant to Section 33(5) of the IBC. By the same order, the NCLT also appointed the appellant as the liquidator.

In accordance with Section 60(5) of the IBC, the appellant filed I.A. No. 474 of 2019 with the NCLT, asking for a directive ordering the respondent to release the corporate debtor’s warehoused goods on July 1st. The NCLT approved I.A. No. 474 of 2019, which was submitted by the appellant, on February 25, 2020, and issued the following instructions:

  1. i) The respondents must be granted unhindered access to remove the material from the customs-bonded warehouses without raising any objections or needing to pay customs fees.
  2. ii) The Respondents are free to file their claim with the Applicant-Liquidator regarding the customs duty charges that are due on the release of materials that are a part of the corporate debtor company (in liquidation), in accordance with the provisions of the Insolvency and Bankruptcy Code of 2016 and the law.

iii) Within two weeks of receiving an authenticated copy of this order from the liquidator, the Customs Department must permit the removal of goods or material.

The Adjudicating Authority directed the release of certain goods lying in the Customs Bonded Warehouses without payment of customs duty and other levies.


Following the aforementioned judgment, the appellant sold the items that were being stored in Surat for a sum of Rs. 169.11 crores. The sale of the goods that are currently being stored in Dahej, Gujarat, is being contested before this court in C.A. Nos. 7722 and 7731 of 2021.

On March 4, 2021, the respondent appealed a decision made by the NCLT on February 25, 2020, to the NCLAT. On November 22, 2021, the NCLAT passed the impugned order, whereby it allowed the appeal filed by the respondent and set aside the directions of the NCLT requiring the respondent to release the warehoused goods into the possession of the appellant without seeking the customs dues. The NCLAT instead directed that the warehoused goods be “released or disposed of as per applicable provisions of the Customs Act by the Proper Officer”. The NCLAT granted the respondent’s appeal after determining that the items in the customs-bonded warehouse were not considered corporate debtor assets because the corporate debtor had neither made any claims for the items following their import nor had the bills of entry for some of the aforementioned items been cleared. The NCLAT ruled that the corporate debtor, who was the importer, had given up ownership of the imported goods by failing to file the aforementioned bills of entry.

The NCLAT holds that the Customs Act’s Sections 48 and 72 are deemed to have rendered the corporate debtor’s title to the imported goods invalid. The respondent therefore has the right to sell the goods and collect the taxes due.

According to the NCLAT, “imported goods,” which are subject to customs duty, are given a different treatment because paying the duty is an unavoidable consequence of importing the goods rather than the corporate debtor’s responsibility. The appellant cannot be in a stronger position than the corporate debtor he represents or seize assets that the corporate debtor could not have acquired on his own. Therefore, customs duty must be paid before the goods can be released from storage.

According to the NCLAT, the Customs Act is a thorough piece of legislation that clearly states that goods in storage cannot be released until import duties have been paid. By submitting claims using “Form C” to the appellant, the respondent does not automatically forfeit the ability to control the stored goods.


The appellant filed a civil appeal against the contested decision after feeling wronged by the NCLAT’s earlier decision. Speaking on behalf of the appellant, Mr. Arvind Datar, learned senior counsel, cited Section 48 of the Customs Act and clarified that it only applies to goods that the importer has neither cleared nor warehoused. Therefore, the goods are owned by the corporate debtor. It has subsequently admitted that the Corporate Debtor is the owner by providing notice in accordance with Section 72 of the Customs Act and submitting its claim to the liquidator. No transfer to the respondent is implied by Sections 72 or 48 of the Customs Act. Furthermore, the respondent has never been informed that the corporate debtor has given up ownership of the goods.

Only the Corporate Debtor’s ownership of the goods serves as the foundation for the respondent’s demands made against the appellant. The respondent cannot make contradictory statements by reiterating before this Court that the Corporate Debtor no longer owns the aforementioned goods.

Given that the respondent’s statutory obligation under Section 142A of the Customs Act is expressly subordinate to the IBC, the respondent was unable to exercise its right under that Act. Sections 14 and 33 of the IBC are violated by the respondent’s possession of the goods of the corporate debtor. IBC Section 14(1)(a) expressly forbids commencing or pursuing legal action against the Corporate Debtor while the moratorium is in force. In addition, Section 14(1)(c) forbids the foreclosure, recovery, or enforcement of any security interest against the Corporate Debtor.

It should be noted that this issue has become important because the Customs Authorities are trying to sell the goods that are being stored on behalf of the Corporate Debtor, who is in the process of liquidating its assets. In order to exercise this authority, the respondent has relied on a few provisions of the Customs Act. This is fiercely contested by the appellant in this case, who claims that once an insolvency proceeding has been initiated against a corporate debtor, the IBC automatically applies and supersedes any other statutes that give property charges priority.

This legal query has not received a direct response from the NCLAT. Instead, it has delved into the case’s facts to highlight how the IBC differs from the Customs Act in terms of applicability. The NCLAT ruled that because the Corporate Debtor had abandoned the goods before the insolvency process began, the Customs Authority now owned the goods.

Section 14 of the IBC prescribes a moratorium on the initiation of CIRP proceedings and their effects. The moratorium has a number of objectives, one of which is to keep the assets of the Corporate Debtor in one location throughout the insolvency resolution process and to facilitate the orderly execution of the processes required by the statute.  There is less chance of conflicting outcomes in the process when such measures are taken to ensure the restriction of parallel proceedings.

February 2020 Report of the Insolvency Law Committee:

8.2 “The moratorium under Section 14 is intended to keep the corporate debtor’s assets together during the insolvency resolution process, facilitating orderly completion of the processes envisaged during the insolvency resolution process and ensuring that the company may continue as a going concern while the creditors take a view on the resolution of default.” In order to reach resolution as a going concern and potentially maximize value for all stakeholders, the corporate debtor’s operations must be maintained throughout the CIRP.  In other jurisdictions as well, formal insolvency proceedings like liquidation and reorganization proceedings may be delayed.  The UNCITRAL Guide notes that a moratorium is critical during reorganization proceedings since it “facilitates the continued operation of the business and allows the debtor a breathing space to organize its affairs; time for preparation and approval of a reorganization plan and for other steps such as shedding unprofitable activities and onerous contracts, where appropriate.”[1]

Imposing a moratorium is one way to enable Section 14(1)(a), (b), and (c) of the IBC to protect the Corporate Debtor from financial assaults, as was previously mentioned. This is done to give the corporate debtor some breathing room, enable it to continue operating normally, and help it rebuild its credit.  Any other interpretation would breach this barrier and harm the desired outcome.

The corporate debtor shall not commence any action in court or otherwise, except as provided in Section52, after the issuance of a liquidation order. The liquidator is permitted to file a lawsuit or take other legal action on behalf of the corporate debtor, but only with the Adjudicating Authority’s prior approval, according to the terms of the agreement. Even if a company enters liquidation, this moratorium remains in effect.

It is important to note that the IBC, which was passed more recently, clearly supersedes the Customs Act. This is abundantly clear from a reading of Section 142A of the Customs Act.

“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, the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993, and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002,  be the first charge on the property of the assessee or the person, as the case may be.”[2]

As a result, Section 238 of the IBC also formally acknowledges a comparable exception set forth under the Customs Act. Furthermore, it should be noted that Section 238 of the IBC expressly supersedes any legal provisions that conflict with it.

Section 238 of the IBC provides as under:

“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force, or any instrument having effect by virtue of any such law.”[3]


There would be a blatant violation of Sections 14 or 33(5) of the IBC if demand notices were sent out to seek enforcement of customs dues during the moratorium period. This is so because the demand notices are the beginning of formal legal action against the Corporate Debtor. The foregoing analysis, however, would be incomplete unless this Court also considered the scope of the respondent authorities’ legal authority during the IBC’s moratorium period. The only action the government can take is to figure out what taxes, interest, fine, or penalties are owed. The authority, however, is not permitted to enforce a claim for recovery or levy interest on the tax due during the moratorium. In this case, the relationship between the IBC and the Customs Act is perfectly captured by the ratio above.

We conclude from the foregoing discussion that the respondent was only permitted to start the assessment or reassessment of the duties and other levies. They cannot begin a recovery in violation of IBC Sections 14 or 33(5) by crossing this line.  The interim resolution professional, resolution professional, or liquidator, as applicable, has a responsibility to confirm the validity of the assessment and has been given sufficient power to challenge any assessment if he thinks it is excessive.

The order from NCLAT was revoked after the appeal was upheld.


[1] February 2020 Report of the Insolvency Law Committee.

[2] Section 142A of Central Board of Indirect Taxes and Customs.



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