In a recent judgment in the case of ABG Shipyard1, the Supreme Court has decided an extremely relevant question of law concerning the liquidation process under the Insolvency & Bankruptcy Code, 2016 (“IBC”).
The role of a Liquidator under IBC is in a sense quite simple and straight-forward, being to liquidate the assets of the debtor and distribute the sale proceeds to the creditors. However, practically, taking possession of assets of a debtor and undertaking sale, particularly in cases of large businesses with spread out assets, can often get quite complex. One such complexity that was frequently arising was in respect of sale of moveable assets of a debtor where dues of customs, ports, warehouse etc. were unpaid.
Given the grey areas of law involved, since several years, smaller disputes had broken out before National Company Law Tribunals pan India (“NCLT”) and carried in Appeal before the National Company Law Appellate Tribunal (“NCLAT”) where Liquidators appointed under the IBC were facing a challenge in liquidating assets of the company in liquidation on account of unpaid custom and freight dues in respect of the moveable assets lying at custom bonded warehouses and container freight stations.
In the case of ABG Shipyard, the NCLAT had given certain radical findings to the effect that (1) the Customs Act has overriding effect on IBC and (2) the title in the asset lying at the bonded warehouse vested with the Customs Authority on account of unpaid dues. Basis this, the NCLAT had prohibited these assets from being treated as part of the liquidation estate and permitted the customs Authority to sell/confiscate the goods in terms of process under the Customs Act.
Reversing the judgment of the NCLAT, the Supreme Court has given two clear findings – (1) The provisions of IBC will override the provisions of the Customs Act; and (2) The title of the goods continues to remain with the debtor in liquidation and the liquidator can secure goods and deal with them under the provisions of IBC.
In giving the above findings, the Supreme Court has rightly reversed the Order of the NCLAT which had effectively held that if customs duty was unpaid, the title of the goods vested with the Customs Authority and not the Liquidator. Juxta posing the position under Section 142A of the Customs Act with Section 238 of IBC, the Supreme Court has clarified that while generally the liability created under the Customs Act has a first charge over the property of an assessee, this provision is overridden by the provisions of IBC. Concluding its explicit findings, the Supreme Court has held that the course of action available to the Customs Authority is to file a claim before the Resolution Professional / Liquidator and the Liquidator is entitled to secure the goods so the same may be dealt with in terms of the provisions of the IBC.
This judgment of the Supreme Court brings about the much-needed clarity on this issue as moveable assets of significant value were often found to be lying at ports, freight stations. Not being permitted to remove and liquidate the same was very concerning for stakeholders, particularly creditors such as banks and financial institutions that have security interest over such assets.
The issue that is yet to be decided is whether such authorities including Customs, Port Trust etc. can be treated as secured creditors by virtue of a statutory lien over the goods and if so, whether such lien would rank above the charge of the existing lenders such as banks.
AUTHORS: Dhiraj Mhetre (Partner) | Smiti Tewari (Partner)
