SC ruling on IBC will have overriding effect over indirect tax recoveries
The Supreme Court (SC), in a significant verdict, has ruled that liquidation proceedings in the case of a bankrupt firm will take precedence over recoveries of indirect taxes once a moratorium has been imposed under the Insolvency and Bankruptcy Code (IBC).
The court judgment is on a dispute between the Central Board of Indirect Taxes and Customs (CBIC) and ABG Shipyard. ABG Shipyard, which owes Rs 22,842 crore to its creditors, is undergoing liquidation. The firm’s promoters are facing a multi-agency probe for allegedly siphoning off money given as bank loans.
The court held as regards tax recoveries initiated by the Customs, a department under the CBIC, it “should not” have the first right of recovery from distressed assets after the initiation of a moratorium under the IBC.
“While customs authorities have the powers to assess the quantum of dues, it does not have the powers to initiate recovery of dues under the Customs Act,” a three-judge Bench held.
“We are of the clear opinion that the demand notices to seek enforcement of customs dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be. This is because the demand notices are an initiation of legal proceedings against the corporate debtor (ABG Shipyard).”
The matter pertains to the CBIC claiming its dues after liquidation proceedings were launched against the firm at the National Company Law Tribunal (NCLT), Ahmedabad.
The imported goods of the company were lying in a Customs-bonded warehouse. The CBIC had filed claims for Customs duty due to export obligations not being fulfilled even after the date of the NCLT order of liquidation during May 2019.
The CBIC wanted to auction the goods. The department had served the recovery notice in July the same year (that is after the liquidation order of the NCLT). Rejecting the claims, the NCLT ordered Customs to allow the goods to be cleared and asked it to lodge its claims before the liquidator under the IBC.
It had held that the claim of the department with respect to Customs duty would be dealt with as government dues. Effectively, the NCLT said the provisions of the IBC would have priority over Customs recoveries.
Subsequently, the NCLAT reversed the decision in 2021, allowing the appeal of the CBIC, and directed that goods could be released or disposed of only in line with the Customs Act. The liquidator then moved the Supreme Court, challenging the move.
The Supreme Court said the Customs dues had to be settled in accordance with the IBC and the liquidator was the owner of the goods after the initiation of IBC proceedings.
Case file
- In May 2019, NCLT approves liquidation proceedings against ABG Shipyard
- CBIC files claim in NCLT, seeking recovery of Rs 763 cr in tax dues
- ABG liquidator objects, seeks custody of imported goods from CBIC
- NCLT rules in favour of liquidator, saying IBC provisions shall take precedence over Customs Act
- CBIC moves NCLAT, which reverses the NCLT order
- The liquidator files appeal in SC
- CBIC “should not” have first right of recovery from distressed assets, says SC
