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SC: Once Moratorium is Executed, IBC Prevails Over Custom Act

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IBC Law Insider

Aastha Thakur

Published on: 27 August 2022 at 22:24 IST

The Supreme Court held that provisions of the Insolvency and Bankruptcy Code (IBC) would take precedence over the Customs Act once a moratorium is executed.

The bench, comprising of Chief Justice of India NV Ramana and Justices JK Maheshwari and Hima Kohli, ruled that the Central Board of Indirect Taxes and Customs (CBIC) has limited authority to determine customs and could not initiate recovery of dues in such cases.

The IBC would prevail over The Customs Act, to the extent that once moratorium is imposed in terms of Sections 14 or 33(5) of the IBC as the case may be, the respondent authority only has 35 a limited jurisdiction to assess/determine the quantum of customs duty and other levies. The respondent authority does not have the power to initiate recovery of dues by means of sale/confiscation, as provided under the Customs Act.

NCLAT, while concluding this matter, held that the liquidator’s intent to possess uncleared goods from the customs warehouses without upfront payment of customs duty was against the provisions of the Customs Act.

Furthermore, it was held that the customs-bonded warehouses could not be taken as assets of the corporate debtor.

The NCLT had considered Section 238 of the IBC and held that its non-obstante clause has an overriding effect on proceedings under the Customs Act.

The Bench underlined the two questions of law before it:

a) Whether the provisions of the IBC would take precedence over the provisions of the Customs Act, and if so, to what extent?

b) Is it possible for the respondent to claim title to the goods and issue a notice to sell the goods under the Customs Act after the liquidation process has begun?

It was noticed that the demand notices issued by the respondent were plainly in the teeth of Section 14 of the IBC as they were issued after the initiation of the CIRP proceedings … [and] clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be”.

Hence, the Court held that the respondent couldn’t claim title over the goods and issued notice to sell the goods in terms of the Customs Act when the liquidation process had already been initiated.

Furthermore, the Court was of the opinion that the respondent authority has to submit its claims concerning customs dues/operational debt strictly in terms of the procedure laid down in the IBC before the adjudicating authority.

In any case, the IRP/RP/liquidator can immediately secure goods from the respondent authority to be dealt with appropriately, in terms of the IBC.