Supreme Court: In a civil appeal by the Industrial Development Bank of India (‘IDBI') against the Judgment of Andhra Pradesh High Court, whereby it was held that incase of winding up, the customs authorities have the first right to sell the imported goods under the Customs Act, 1962 (‘Customs Act') and adjust the sale proceeds towards payment of customs only, the Division Bench of Sanjiv Khanna* and Sudhanshu Dhulia, J. allowed the appeal and held that Customs Act does not create a first charge overriding the charge in favour of secured creditor, in view of Section 529A of the Companies Act, 2013 (‘the Act').
Background
Sri Vishnupriya Industries Limited (‘Company') had availed financial assistance from IDBI and as a security, movable properties, namely machinery and its components were hypothecated, which is the subject matter of dispute. Subsequently, show cause notice was issued and orders were passed, levying customs duty of Rs.3,27,22,191/- and Rs.10,48,29,017/-. Upon non-payment of customs duty, an order was passed for the sale of the warehoused goods in order to recover the customs duty. Meanwhile, the High Court directed winding up of the Company. The Single Judge allowed the Official Liquidator's application and directed the customs authorities to handover possession of the imported goods, which had been put up for auction for payment of the customs duty and observed that the authorities had not followed the procedure under the Customs Act.
An intra-Court appeal was preferred by the Customs authorities and a question was raised whether the claim of a secured creditor has precedence over the right of the customs authorities to recover the customs duty? The High Court set aside the Single Judge's order and allowed the appeal.
Hence, the present appeal by the IDBI.
Analysis and Decision
The Court perused Section 529A and Section 530 of the Act which provides for ‘Overriding preferential payments' and ‘Preferential payments', respectively. The Court said that when there is a clash and disagreement between Section 529A of the Act and another provision of the Act or any other enactment in force on 24-05-1985, Section 529A prevails and the debts are to be paid in terms of Section 529A of the Companies Act. On perusing Section 529A of the Act, the Court said that the debt due to the workmen and the debt due to secured creditors as specified, are on equal footing and are to be paid in the manner prescribed therein in priority to all other debts. The Court also added that the taxes, cess and rates due to the Central and State governments or local authorities under Section 530 of the Companies Act cannot be given priority over the payments/debts mentioned in Section 529A of the Companies Act.
The Court said that Section 456 of the Act provides that all the property and effects of the Company shall be deemed to be in the custody of the Tribunal/Court as from the date of the order for the winding up of the Company. The Court said that there are two-fold objectives of giving jurisdiction to the Company Court/ Tribunal during the process of liquidation of the Company:
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to prevent scramble and dissipation of the assets of an insolvent company, so that they are amassed and constellated;
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the Company Court/Tribunal is entrusted with paying off debts from the sale proceeds of the assets so assimilated, according to the waterfall mechanism provided for and specified under Sections 529, 529A and 530 of the Companies Act.
Regarding the question that whether the Customs Act creates a first charge overriding the charge in favour of the secured creditor i.e., IDBI, the Court referred to Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., (2000) 5 SCC 694, wherein, while examining the issue of priority of Government dues or Crown debts over the dues of other creditors, it was opined that the Crown’s preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The Court said that the common law doctrine giving preferential rights to the Crown debts confined to ordinary or unsecured creditors constitutes ‘law in force' within the meaning of Article 372(1) of the Constitution of India, and accordingly, this law continues to be in force.
The Court noted that in the present case, upon import of the goods, the Company had entered the goods for home consumption under Section 46 of the Customs Act. The Court also perused the Section 68 of the Customs Act, since the goods were stored in a private bonded warehouse. It was also noted by the Court that the goods were not released on non-payment of customs duty etc. and, thereupon, show cause notices dated 17-02-2000 and 10-04-2000 were issued and two adjudication orders dated 15-09-2000 and 10-11-2000 were passed. Thus, the Court held that the debt was due by the date of the two adjudication orders. The Court also said that the relevant date was the date of winding up of the Company i.e., 01-12-2023 and the customs duty became ‘due and payable' prior to the twelve months of the relevant date. Hence, the Court said that the amount ‘due and payable' in terms of the two adjudication orders dated 15-09-2000 and 10-10-2000 would, therefore, not fall in the category of preferential payments under clause (a) to Section 530(1) of the Act.
Further, relying on Dena Bank (Supra), the Court opined that the Section 61, 72 and 142 of the Customs Act do not incorporate a statutory first charge on the customs dues. The Court also held that the provisions in the Customs Act do not negate or override the statutory preference in terms of Section 529A of the Act.
Therefore, the Court allowed the IDBI's appeal, and the impugned order of the High Court was set aside. The Court also directed that the sale proceeds deposited in the Court and converted into fixed deposit receipts, along with the interest accrued thereon, shall be paid to the Official Liquidator to be distributed in accordance with the provisions of Sections 529A and 530 of the Act.
[Industrial Development Bank of India v. Superintendent of Central Excise & Customs, 2023 SCC OnLine SC 1024, Decided on 18-08-2023]
*Judgment Authored by: Justice Sanjiv Khanna
Know Thy Judge| Supreme Court of India: Justice Sanjiv Khanna
