CASE BRIEF: Sundaresh Bhatt, Liquidator Of Abg Shipyard Vs. Central Board Of Indirect Taxes And Customs

Introduction

The case of Sundaresh Bhatt, Liquidator of ABG Shipyard vs. Central Board of Indirect Taxes and Customs stands as a pivotal moment in India’s evolving insolvency jurisprudence. This Supreme Court decision addresses critical legal questions regarding the interplay between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Customs Act, 1962, particularly concerning the priority of claims and the scope of the moratorium during corporate insolvency and liquidation proceedings.

The dispute arose when the Central Board of Indirect Taxes and Customs (CBIC) asserted its right to retain goods stored in customs-bonded warehouses due to unpaid customs duties, despite an ongoing liquidation process under the IBC. The National Company Law Tribunal (NCLT) ruled in favor of the liquidator, mandating the release of assets, but this was overturned by the National Company Law Appellate Tribunal (NCLAT), which upheld the customs authority’s claim.

The Supreme Court’s ruling clarified fundamental principles of insolvency law, reinforcing the supremacy of the IBC in determining the distribution of a corporate debtor’s assets. This judgment not only reaffirmed the IBC’s primacy over conflicting statutes but also reinforced the importance of a structured resolution framework to ensure fairness, transparency, and adherence to statutory mandates in corporate insolvency.

FACTS

The appellant, Sundaresh Bhatt, was appointed as the liquidator of ABG Shipyard Ltd. (the corporate debtor) following the initiation of liquidation proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). ABG Shipyard, engaged in shipbuilding, regularly imported raw materials and stored them in customs-bonded warehouses in Gujarat and Maharashtra. The dispute arose when the Central Board of Indirect Taxes and Customs (CBIC) refused to release these warehoused goods without the payment of outstanding customs duties, despite the ongoing liquidation process.

On August 1, 2017, the National Company Law Tribunal (NCLT), Ahmedabad, admitted ABG Shipyard into the Corporate Insolvency Resolution Process (CIRP) and imposed a moratorium under Section 13(1)(a) of the IBC. The appellant, as the resolution professional, notified the customs authorities and sought custody of the warehoused goods. However, the CBIC subsequently issued multiple demand notices between March and April 2019, seeking payment of customs dues totaling ₹763,12,72,645 before allowing the release of goods.

Following the failure of the resolution process, the NCLT ordered liquidation on April 25, 2019, appointing the appellant as the liquidator. Despite repeated requests, the customs authorities refused to release the goods, prompting the appellant to file an application before the NCLT under Section 60(5) of the IBC. On February 25, 2020, the NCLT ruled in favor of the appellant, directing CBIC to release the goods without requiring upfront customs duty payments. It held that customs claims should be dealt with under the IBC’s liquidation process, with dues ranked according to the waterfall mechanism under Section 53 of the IBC.

CBIC challenged the ruling before the National Company Law Appellate Tribunal (NCLAT), arguing that the goods were not part of the corporate debtor’s assets, as the company had failed to clear them for home consumption and had abandoned them before insolvency. The NCLAT overturned the NCLT’s decision on November 22, 2021, ruling that customs-bonded goods could not be released without paying duties, as per the Customs Act, 1962. The tribunal also held that the IBC did not override customs authorities’ rights to sell such goods to recover dues.

Dissatisfied with the decision, the appellant approached the Supreme Court, seeking a ruling on the conflict between the IBC and the Customs Act. The case raised fundamental questions about statutory priority, the treatment of government claims in insolvency, and the extent of a liquidator’s rights over warehoused goods during liquidation proceedings.

ISSUES

1. Whether the Central Board of Indirect Taxes and Customs (CBIC) had the legal authority to withhold the release of warehoused goods belonging to the corporate debtor during the insolvency and liquidation process under the Insolvency and Bankruptcy Code (IBC), 2016.
2. Whether the provisions of the IBC, particularly the moratorium under Section 14 and the liquidation framework under Section 53, override the customs authorities’ right to recover dues under the Customs Act, 1962.
3. Whether the NCLAT’s decision upholding CBIC’s claim over the warehoused goods was consistent with the principles of insolvency law, including asset distribution and creditor hierarchy under the IBC.

ARGUMENTS FROM BOTH SIDES 

Arguments by the petitioners

• The petitioner argued that the Insolvency and Bankruptcy Code (IBC), 2016, has an overriding effect over other laws, including the Customs Act, 1962, as per Section 238 of the IBC. Since the corporate debtor was undergoing liquidation, any claims by the customs authorities should be settled through the liquidation framework and not through independent enforcement measures.
• The petitioner contended that the customs department’s attempt to retain and auction the warehoused goods violated the moratorium imposed under Sections 14 and 33(5) of the IBC. These provisions prohibit the initiation or continuation of any recovery proceedings against the corporate debtor outside the insolvency resolution or liquidation process.
• It was argued that the goods stored in the customs-bonded warehouse were assets of the corporate debtor and formed part of the liquidation estate. By filing claims under the IBC, the customs authorities had implicitly accepted that their dues must be settled through the liquidation process, making any unilateral action to seize or sell the goods unlawful.
• The petitioner emphasized that under Section 53 of the IBC, government dues, including customs duty, are classified as operational debt and must be settled in accordance with the prescribed priority order. Allowing customs authorities to claim priority over other creditors would undermine the structured distribution mechanism of the IBC.

Arguments by the Respondents

• The respondents argued that the goods stored in customs-bonded warehouses did not belong to the corporate debtor until the customs duties were paid. As the corporate debtor had failed to clear these dues, it had effectively relinquished ownership, and the customs authorities were entitled to retain and dispose of the goods under the Customs Act.
• The respondents maintained that the Customs Act of 1962 is a self-contained code that governs the clearance and disposal of warehoused goods. They argued that the IBC does not override the customs authorities’ right to detain or sell goods to recover duties, as such actions are not “legal proceedings” but part of statutory customs enforcement.
• The respondents asserted that customs duty is not merely a debt but a statutory obligation arising from the import of goods. They argued that the demand for duty and subsequent action to recover it was lawful under Sections 48 and 72 of the Customs Act, which empowers customs officials to seize and auction goods if duties remain unpaid.

DECISION

In Sundaresh Bhatt, Liquidator of ABG Shipyard vs. Central Board of Indirect Taxes and Customs, the Supreme Court addressed critical questions regarding the interplay between the Insolvency and Bankruptcy Code (IBC), 2016, and the Customs Act, 1962, particularly in relation to creditor rights, statutory compliance, and the authority of customs officials over warehoused goods.

The Court ruled that the IBC takes precedence over the Customs Act in insolvency proceedings. It held that once a moratorium under Section 14 or Section 33(5) of the IBC is in effect, customs authorities cannot initiate or continue recovery actions independently. The demand notices and retention of the corporate debtor’s goods by the customs authorities were deemed to be in violation of the moratorium provisions.

Further, the Court found that the warehoused goods formed part of the corporate debtor’s liquidation estate and must be dealt with in accordance with the waterfall mechanism under Section 53 of the IBC. It rejected the argument that unpaid customs duties extinguished the corporate debtor’s ownership rights over the goods.

Accordingly, the Supreme Court overturned the National Company Law Appellate Tribunal’s (NCLAT) ruling and upheld the National Company Law Tribunal’s (NCLT) decision, directing the customs authorities to release the goods to the liquidator. This judgment reinforced the supremacy of the IBC in insolvency matters and upheld the principle of equitable distribution of assets.

CONCLUSION 

The Supreme Court’s ruling in Sundaresh Bhatt, Liquidator of ABG Shipyard vs. Central Board of Indirect Taxes and Customs reinforces the primacy of the Insolvency and Bankruptcy Code (IBC), 2016, in determining the treatment of creditor claims and the distribution of assets in insolvency proceedings. The decision highlights the importance of statutory compliance, procedural clarity, and the structured resolution of claims within the IBC framework.

A key aspect of the judgment was the recognition that the customs authorities could not assert independent control over the corporate debtor’s assets once the insolvency process had begun. By holding that the warehoused goods formed part of the liquidation estate, the Court rejected the argument that non-payment of customs duties nullified the corporate debtor’s ownership rights. This reinforced the principle that all claims, including government dues, must be settled through the IBC’s waterfall mechanism under Section 53.

The ruling also underscored the necessity of adhering to the moratorium under Sections 14 and 33(5) of the IBC. By invalidating CBIC’s actions to retain and dispose of the goods, the Court reaffirmed that insolvency proceedings provide a single unified mechanism for claim resolution.

This decision sets a significant precedent for insolvency jurisprudence in India, ensuring that the objectives of fairness, transparency, and statutory hierarchy are maintained in corporate liquidation processes.