In a recent judgment1 overturning the order of the NCLT, Ahmedabad (NCLT), the NCLAT New Delhi (NCLAT) held that abandoned imported goods lying in the customs warehouses for several years, cannot be considered a part of the Corporate Debtor's (CD) assets.
The CD had imported materials which were lying in Customs Bonded Warehouses (warehouse) at specific locations for construction and building of ships for further export after manufacturing. The CD availed benefits under the Export Promotion Capital Goods Scheme and other related schemes/notifications but failed to pay the requisite custom duty. The NCLT by its order had allowed removal of materials lying in the warehouse without payment of customs duty.
Arguments of the Customs Department
The Customs Department argued that the warehoused goods did not belong to the CD without payment of requisite custom duty. As the goods had not become assets of the CD, hence the liquidator could not take possession of the same 2, unless an order clearing the goods for consumption under Section 68 and 71 of the Customs Act, 1962 (Customs Act) had been passed. Effectively, liquidator cannot be in a better position than what the CD would have been, when the CD itself did not possess the title.
Arguments of the Liquidator
It was argued by the liquidator that notice was issued to the CD under Section 72 of the Customs Act which can only be issued to the owner of the goods. Non-possession of goods does not amount to relinquishment of rights over the goods3.
The Customs Department had already filed a claim4 with the liquidator and thus subjected its statutory dues to be governed by IBC's provisions and, more specifically, to the priority of distribution provided under Section 53 of the IBC. Retaining the CD's goods would amount to a breach of the waterfall mechanism provided under Section 53 of IBC as well as the Section 238 of IBC, pursuant to which IBC shall have an overriding effect notwithstanding any other inconsistent law 5.
The NCLAT observed that the goods lying in the warehouse were not that of the CD since the CD never claimed them after importing them between 2012 to 2015. CIRP was initiated in 2017 and the CD entered the liquidation process in 2019. By not filing the bill of entry for several years; not paying the Customs Duty and other charges and not taking clearance, the CD is deemed to have lost/relinquished his title to the imported goods, in terms of Section 45, 48 & Section 72 of the Customs Act. Thus, it was held that the Customs Department is empowered to sell the goods and to recover the government dues.
Even before initiating the CIRP the CD could not have secured the possession of the imported goods except by paying the customs duty. The liquidator who represents the CD cannot stand in a position better than the CD. Thus, the goods cannot be treated as assets of the CD.
The NCLAT by relying upon a Supreme Court judgment6 noted that by filing the claim before the Liquidator, it cannot be said that the Customs Department had relinquished its right over the warehoused goods and submitted it to the jurisdiction of the liquidator. The liquidator's assertion to possess the uncleared goods without upfront payment of customs duty, is against the statutory provisions of the Customs Act. Goods subject to levy of duty stand on a different footing than goods not in the CD's possession and thus goods lying in the warehouse cannot be considered as CD's assets.
The judgement elaborates on the general understanding that the resolution professionals or liquidators can take possession of the CD's assets no matter where they are located, by intricately carving out a distinction between actual assets of the CD at the time of CIRP vis a vis asset which the CD only claims to be owning.
1. Central Board of Indirect Taxes and Customs v. Sundaresh Bhatt, Liquidator of ABG Shipyard, arising out of Impugned Order dated February 25, 2020, passed by the Adjudicating Authority/National Company Law Tribunal, Ahmedabad Bench, Ahmedabad in IA No. 474/2019 in Company Petition (IB) No.53/NCLT/AHM/2017
2. Sections 45, 47(2), 68, 71 and 72 of the Customs Act, Collector of Customs Dytron India Ltd. (1999 (108) ELT 342 (Cal.)]
3. Encore Asset Reconstruction Company Pvt. Ltd vs Ms Charu Sandeep Desai & Ors. (Company Appeal (AT) (Insolvency) No. 719 of 2018)
4. Section 38 of IBC.
5. CIT v. Monnet Ispat and Energy Ltd. (2018) SCC Online SC 3465, Duncans Industries Ltd. v. A.J. Agrochem (2019) 9 SCC 725,
6. ICICI Bank Ltd. v. SIDCO Leathers Ltd. 2006) 10 SCC 452
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