Customs Act Does Not Create A Statutory First Charge Overriding Charge In Favour Of Secured Creditor Under S. 529A Of Companies Act : Supreme Court

The Supreme Court has ruled that in case of winding up of a company, the customs duty owed by the company would be treated as a preferential payment under Section 530(1) (a) of the Companies Act, 1956. But customs duty would not override and be given preference over the payments due to overriding preferential creditors covered under Section 529A of the Companies Act, which include the secured creditors, the court has held.The court said that the Customs Act, 1962 does not create a statutory first charge on the customs dues, overriding the charge created in favour of the secured creditor under Section 529A of the Companies Act, 1956. The bench comprising Justices Sanjiv Khanna and Sudhanshu Dhulia said that the provisions in the Customs Act do not, in any manner, negate or override the statutory preference envisaged in Section 529A of the Companies Act, which treats the workmen’s dues and the dues owed to secured creditors as overriding preferential payments in case of winding up of a company. Thus, the court said that the taxes, cesses and rates due to the Central and State governments or local authorities under Section 530 of the 1956 Act, cannot be given priority over the payments/debts mentioned in Section 529A. Therefore, the prior secured creditors are entitled to enforce their charge, notwithstanding the government dues payable under the Customs Act, the Supreme Court said while hearing the appeal filed by Industrial Development Bank of India (IDBI), who stood as a secured creditor of a company which was ordered to be wound up in 2003.During 1994-2000, IDBI had granted financial assistance to one M/s. Sri Vishnupriya Industries Limited, who had hypothecated and mortgaged its movable and immovable properties, respectively, with the bank. After the company was directed to be wound up vide an order passed on 01.12.2003, the Official Liquidator filed an application under Section 468 of the Companies Act for directing the customs authorities to handover possession of the goods imported by the company. The goods which had been initially warehoused in terms of Section 68 of the Customs Act, were put up for auction by the Customs Authorities since the company had failed to make payment of the customs duty.The said application was allowed by a single judge of the Andhra Pradesh High Court, who opined that since an order of winding up had been passed, the assets of the company in liquidation, including the imported goods, vested in the Official Liquidator by operation of law. The plea regarding the custom authorities’ entitlement and right under the Customs Act to sell the imported goods to realise their dues, was rejected by the single judge.However, the full bench of the Andhra Pradesh High Court in appeal set aside the order of the single judge. The full bench held that notwithstanding the winding up order and the provisions of Section 529A and 530 of the Companies Act, the customs authorities have the first right to sell the imported goods under the Customs Act and adjust the sale proceeds towards payment of customs duty.In the appeal filed against the order of the full bench, the top court observed that Section 529A of the Companies Act, which was enforced with effect from 24.05.1985, is a non-obstante provision which is to be given primacy in case of conflict. “Therefore, when there is a clash and disagreement between section 529A of the Companies Act and another provision of the Companies Act or any other enactment in force on 24th May 1985, Section 529A prevails and the debts are to be paid in terms of Section 529A of the Companies Act,” said the court.Referring to Section 529A(1), the court said that on winding up of a company, the debt due to the workmen and the debt due to secured creditors, as specified, rank pari passu and are to be paid in the prescribed manner in priority to all other debts.Further, Section 530 of the Companies Act, which deals with preferential payments that are a level below the overriding preferential payments under Section 529A, is subject to provisions of Section 529A, the court said. Thus, the court held that it was beyond debate that the provisions of Section 529A prevail over Section 530 of the Companies Act.It added: “IDBI is an overriding preferential creditor under Section 529A of the Companies Act and at best, if the requirements of clause (a) to Section 530(1) of the Companies Act are satisfied, the customs dues would fall under Section 530 of the Companies Act and will be categorized as preferential payment.” Perusing Section 530(1) (a) of the Companies Act, the court observed that the same confers preferential status to all revenue taxes, cesses, and rates ‘due’ to the Central or the State government or to a local authority on the ‘relevant date’, as defined in Section 530 (8) (c) of the 1956 Act, which have become “due and payable within the twelve months next before the relevant date”.Consequently, the debt ‘due and payable’ prior to twelve months next to the...

Customs Act Does Not Create A Statutory First Charge Overriding Charge In Favour Of Secured Creditor Under S. 529A Of Companies Act : Supreme Court

Parina Katyal

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