The Supreme Court on August 26, 2022 in the matter of Sundaresh Bhatt v. Central Board of Indirect Taxes & Customs held that the Insolvency and Bankruptcy Code, 2016 (“IBC”) will prevail over the Customs Act to the extent that once moratorium is imposed, the Customs authority have only limited jurisdiction to assess the quantum and they cannot take steps to recover the dues.

In the instant matter, an appeal was filed by the liquidator of ABG Shipyard Ltd. (“Corporate Debtor”), challenging the order of the NCLAT, directing the release of certain goods lying in the customs bonded warehouses on failure to pay customs duties. The NCLAT held that the Corporate Debtor is deemed to have relinquished its title to its goods lying in the customs bonded warehouses if he fails to clear bills of entry and claim the assets after their import by the action of Sections 48 and 72 of the Customs Act and hence the Customs Authority is empowered to sell the goods and recover the government dues. The legal issue before the Hon’ble Supreme Court was whether the Customs Authority is entitled to confiscate/ appropriate the goods of the Corporate Debtor which is currently undergoing liquidation in terms of IBC and whether the provisions of the IBC precede over the provisions of the Customs Act.

A 3 three judge Court Bench, after analysing the IBC and the Customs Act observed that the IBC, being the more recent statute, clearly overrides the Customs Act which can be made out by a reading of Section 142A of the Customs Act. According to the aforesaid provision, the Customs Authorities would have the first charge on the assets of an assessee under the Customs Act, except with respect to cases under Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993, SARFAESI Act, 2002, and the IBC, 2016. Further, it was observed that Section 238 of the IBC overrides any provision of law which is inconsistent with the IBC.

The Supreme Court held that after the imposition of moratorium in terms of Sections 14 or 33(5) of the IBC, the Customs Authority has a limited jurisdiction to assess/determine the quantum of customs duty and other levies and does not have the power to initiate recovery of dues by means of sale/confiscation/appropriation, as that would tantamount to violation of the lBC and put the applicant/liquidator of the Corporate Debtor company (under liquidation) in disadvantageous position. One of the purposes of the moratorium is to keep the assets of the Corporate Debtor together during the insolvency resolution process and to facilitate orderly completion of the processes envisaged under IBC to protect the Corporate Debtor against pecuniary attacks.

The Supreme Court further ruled that following the imposition of the moratorium, the Customs Authority was only required to assess the duties that were payable and submit its claims (concerning customs dues/operational debt) before the adjudicating authority which would be handled in accordance with the provisions of IBC. The Court held that the IRP/Resolution Professional/Liquidator has the right to take control of the assets belonging to the Corporate Debtor and immediately secure goods from the Customs Authority to be dealt with appropriately, in terms of the IBC.