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 relevant date is not a preferential debt in terms of Section 530(1)(a) of the Companies Act. Such debt will rank pari passu with ordinary or unsecured creditors, without any preferential treatment, the court said.

In the present case, the court ruled that the ‘relevant date’, in the absence of appointment of a provisional liquidator, would be the date on which the winding up order was passed against the Company, which is 1st December 2003.

The court ruled that, in the present case, the debt in form of custom duty had become ‘due’ in terms of the two adjudication orders dated 15th September 2000 and 10th October 2000 and ‘payable’ immediately. “Thus, the customs duty became ‘due and payable’ prior to twelve months next to the ‘relevant date’; the ‘relevant date' being the date of winding up of the Company on 1st December 2003. The amount ‘due and payable’ in terms of the two adjudication orders dated 15th September 2000 and 10th October 2000 would, therefore, not fall in the category of preferential payments under clause (a) to Section 530(1) of the Companies Act,” the court ruled.

On the issue whether the Customs Act creates a first charge overriding the charge in favour of the secured creditor, the court ruled that Sections 61, 72 and 142 of the Customs Act do not incorporate a statutory first charge to override the general law.

“The provisions in the Customs Act do not, in any manner, negate or override the statutory preference in terms of Section 529A of the Companies Act, which treats the secured creditors and the workmen’s dues³³ as overriding preferential creditors; and the government dues limited to debts ‘due and payable’ in the twelve months next before the relevant date, which are to be treated as preferential payments under Section 530 of the Companies Act, but are ranked below overriding preferential payments and have to be paid after the payment has been made in terms of Section 529 and 529A of the Companies Act. Therefore, the prior secured creditors are entitled to enforce their charge, notwithstanding the government dues payable under the Customs Act,” said the court.

The court further took note that Section 142A of the Customs Act, which creates liability under the Customs Act to be first charge, was inserted with effect from 8th April 2011 and does not apply to the present dispute.

The court, however, observed that Section 142A of the Customs Act protects and ensures that the dues under the Customs Act do not, in any way, affect the rights of third parties under Section 529A of the Companies Act, 1956. It further ensures that rights of parties under the following enactments are not affected: (1) Recovery of Debts Due to Banks and the Financial Institutions Act, 1993; (2) The Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 and (3) The Insolvency and Bankruptcy Code, 2016.

“Read in this manner, it is clear to us that the provision of Section 142A of the Customs Act, insofar as it protects the rights of overriding preferential creditors governed and covered by Section 529A of the Companies Act, is clarificatory and declaratory in nature, and does not lay down a new dictum or confer any new right as far as the present case is concerned,” the court said.

It, however, added that: “Section 142A of the Customs Act, post its enactment, would dilute the impact of Section 530 of the Companies Act, which had restricted preferential treatment to government taxes ‘due and payable’ limited to twelve months prior to the ‘relevant date’, without preferential right for taxes that had become ‘due and payable’ in the earlier period.”

The court accordingly allowed the appeal and set aside the impugned judgment of the full bench of the High Court. The bench further directed the sale proceeds of the goods sold in auction by the customs authorities, which were deposited with the Registry of the Court, to be paid to the Official Liquidator, along with interest, so that the same could be distributed in accordance with the provisions of Sections 529A and 530 of the Companies Act, 1956.

Case Title: Industrial Development Bank of India (Through Stressed Assets Stabilization Fund Constituted by The Government of India) vs Superintendent of Central Excise and Customs and Ors.

Citation : 2023 LiveLaw (SC) 683

Counsel for Appellants: Mr. Anand Varma, AOR Ms. Apoorva Pandey, Adv. Ms. Adyasha Nanda, Adv.

Counsel for Respondents: Mr. B. Krishna Prasad, AOR Mr. Mukesh Kumar Maroria, AOR M/s. Lawyers Knit & Co, AOR

Companies Act, 1956: Sections 529, 529A, 530; Customs Act, 1962: Sections 61, 72, 142, 142A

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.

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