Central Bank Of India vs Virudhunagar Steel Rolling Mills - That a creditor is not bound to volunteer to a surety information as to the state of the principal debtor’s account; and that a creditor is entitled to appropriate payments received subsequent to the execution of a guarantee bond, even so far as a pre-existing debt of which the surety had no knowledge.

 Supreme Court (29.12.2015) in Central Bank Of India vs Virudhunagar Steel Rolling Mills [ Civil Appeal No. 3654 of 2006  ] held that;

• That a creditor is not bound to volunteer to a surety information as to the state of the principal debtor’s account; and that a creditor is entitled to appropriate payments received subsequent to the execution of a guarantee bond, even so far as a pre-existing debt of which the surety had no knowledge.

Excerpts of the order;

# 1 This Appeal assails the concurrent findings of the Trial Court as well as the High Court absolving the Respondents, other than Respondent No.1 which is the company which received various credit facilities from the Appellant Bank, of a total amount of Rs.12 lacs against security of moveable as well as raw materials. These facilities were subsequently secured in favour of the Appellant Bank by means of continuing guarantee by the Directors of the Respondent Company, who are Respondent Nos. 2 to 4 herein, in terms of Promissory Notes, Letters of Guarantee, Letters of Hypothecation and Letters of Continuity all dated 30.8.1974. On 30.6.1977 and again on 31.12.1977, by means of separate letters from the Respondent Company to the Appellant Bank, the entire balance due, stood confirmed. Eventually, the Appellant filed a suit on 2.5.1980 for recovery of Rs.3,94,805.42 with future interest at the rate of 14 per cent per annum. In the interregnum another creditor of the Respondent Company, namely Respondent No. 5, had already initiated recovery proceedings in the Court in the course of which the properties of Respondent Company came to be auctioned and were purchased by Respondent No. 6 on 26.10.1979. 

 

# 2 As many as ten issues were framed by the Trial Court which went on to decree the suit against the Respondent Company, but dismissed it as against Respondent Nos. 2 to 4. The conclusions of the Trial Court so far as they are germane to decision in this Appeal were that the liabilities incurred by the Respondent Company prior to the execution of the personal guarantees by Defendant Nos. 2 to 4 were not recoverable from the latter. The Trial Court placed reliance on two judgments of the Madras High Court, namely J.J. Harigopal Agarwal v. State Bank of India AIR 1976 MAD 211 and D. K. Mohammed Ehiya Sahib v. R.M.P.V. Valliappa Chettiar AIR 1976 MAD 536. In the latter case it was held that if there is any variation in the original contract the legal consequence would be that the surety stood absolved. 

 

# 3 The impugned Judgment notes that the main submission on behalf of the Appellant Bank was that all the documents executed by the Respondent Company, including those dated 30.8.1974 and the acknowledgement of liability dated 30.6.1977 and 31.12.1977 had to be taken together in fastening the liability of the Directors of the Company with regard to their personal guarantees. It also noted that in none of the documents relied upon by the Respondent Company had Respondent Nos. 2 to 4 acknowledged or undertaken their personal liability and/or stood guarantee for repayment of any specific and liquidated amounts already advanced by the Appellant Bank to the Respondent Company prior to 30.8.1974. The High Court also returned the finding that there was no cogent evidence to establish that the claims raised in the suit pertained to advance or credits made subsequent to 30.8.1974, the date on which Respondent Nos. 2 to 4 had executed the documents relied upon by the Appellant Bank. 

 

# 4 The learned Counsel appearing for the Appellant Bank had raised arguments, firstly to the question of limitation, secondly to the discharge of surety by variance and thirdly on priority claims in respect of Rollers. Since the question which engaged the attention of the High Court in the impugned Judgment revolved around the fastening of the liability on the Respondent Nos.2 to 4 in respect of transactions prior to the date of the execution of those documents, i.e. 30.8.1974, we shall restrict our attention only to this point. It will be a relevant reiteration that the entire claim of the Appellant Bank had been decreed against the Respondent Company.

 

# 5 So far as the factual matrix is concerned, the Respondent Company was a constituent of the Appellant Bank for a considerably long period and had availed of various facilities including cash credit, etc. It is not in dispute that of the limit of Rs.12 lacs sanctioned by the Appellant Bank in favour of the Respondent Company, the balance on the close of the business on 29.08.1974 was Rs.7,68,853.39, and the latter stood indebted to the former for the aforesaid sum. Learned counsel for the Appellant Bank had sought to rely on Montosh Kumar Chatterjee v. Central Calcutta Bank Ltd. (1952-53) 57 CWN 852, the ratio of which appears to be that a creditor is not bound to volunteer to a surety information as to the state of the principal debtor’s account; and that a creditor is entitled to appropriate payments received subsequent to the execution of a guarantee bond, even so far as a pre-existing debt of which the surety had no knowledge; that there can be no presumption that the surety will be efficacious for prior as well as current and future debts. We note that in the case in hand, the Letter of Guarantee signed on 30.08.1974 by Respondent Nos. 2 to 4 makes no mention of any old transactions, although it specifically records that the liability of the guarantors cannot exceed Rs. 12 lacs. The Letters of Guarantee could easily have recorded the liabilities outstanding against the Respondent Company on 30.8.1974 with an affirmation from Respondent Nos. 2 to 4 that they were guaranteeing these outstandings. Woefully for the Appellant Bank, there is no such acknowledgment or assumption of liability in the subject Guarantee. The High Court has pithily noted the statement of P.W.1, Accountant of the Appellant Bank, who has deposed to the effect that the Deed of Guarantee made no mention of any prior transactions. It appears to us that if any doubts in this regard still persisted, they stood dispelled by the testimony of D.W.1, who has stated in his cross-examination that the Appellant Bank obtained the Guarantee Deed on the understanding that it would be effective and relevant only with regard to debts subsequent to 30.08.1974. This very witness had also clarified that the Guarantee arrangements made no mention whatsoever that they were effective in respect of prior debts.

 

# 6 The decision in Sita Ram Gupta v. Punjab National Bank (2008) 5 SCC 711 is of no advantage to the Appellant Bank. That decision concerns the possibility of a guarantor revoking his continuing guarantee, with the objective of escaping his liability. This is not the case before us in as much as the defence of Respondent Nos. 2 to 4 is that they had agreed to stand surety only for transactions after 30.08.1974. Our attention was also drawn to B. G. Vasantha v. Corporation Bank, Mangalore (2005) 10 SCC 215 as also M.S. Anirudhan v. Thomco’s Bank Ltd. AIR 1963 SC 746 but these decisions do not call for a detailed analysis. It is the Appellant Bank which drafted the Guarantee Deed, and in case of doubt, the document would be read against it. This is the contra proferentem rule, which is of a vintage which brooks no contradiction.

 

# 7 In view of the foregoing discussion, there appears to be no controversy as to the fact that the Guarantee Deeds executed by Respondent Nos. 2 to 4 on 30.08.1974 rendered them personally liable for any transactions or advances made by the Appellant Bank to the Respondent Company after 30.08.1974. There is also no controversy whatsoever that the Bank account lay dormant after this date, all dealings having been transacted much prior thereto. Such being the position, it is not open to the Appellant Bank to pursue Respondent Nos. 2 to 4 for recovery of debts incurred by the Respondent Company in favour of the Appellant Bank. We may clarify that our decision is founded on the evidence that has been recorded in this suit. We should not be misunderstood to have held that a guarantor can, in no circumstances be fastened with liabilities which had been incurred in the past which the guarantor assumed liability for. 

 

# 8 We accordingly dismiss the Appeal by affirming the concurrent findings arrived at by both the Courts below. There shall however be no order as to costs.

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Mr. Chinna Rao & Ors. Vs. V. Venkatasivakumar & Ors. - Further, a mere interest of a `Party’ in the fruits of a `litigation’, cannot be a `yardstick’ / `test’ for his being impleaded as a `Party’.

 NCLAT (12.08.2022) in Mr. Chinna Rao & Ors. Vs. V. Venkatasivakumar & Ors. [I.A. No. 584 of 2022 in Comp. App (AT) (CH) (INS) No. 269 of 2022  ] held that;

• There is no provision in the I & B Code, 2016, that enables the `Creditors’ other than those who triggered the `Insolvency Resolution Process’, to be impleaded as `Parties’. 

• In law, the `Impleadment of Parties’, is ultimately, within the ambit of exercise of discretion by a `Tribunal’ / `Authority’, as the case may be. 

• More importantly, no person, can be added, unless he is a `necessary party’. A `necessary party’ means that a person is very much necessary to the `Constitution’ of `Suit’ / an `Appeal’ in a given `Proceeding’ before a `Court of Law’ / `Tribunal’ / `Authority’. 

• In fact, whether a person has an enforceable legal right is to be looked into by a `Tribunal’ in regard to the `impleadment of parties’. 

• To array a person as a `prospective / proposed Respondent(s)’ is not a `Substantive Right’, but undoubtedly, it is one of the `procedure’ and the `Tribunal’ is to exercise its `judicial discretion’, of course, in a subjective manner, diligently.

• It must be borne in mind that a `necessary party’ is one without whom no `Order’ can be passed effectively, in a given case. A `proper party’ is one in whose `absence’ an effective `Order’ can be made, but `whose presence is necessary’, for a complete and final decision on the `questions’, involved in a given `Proceeding’.

• Further, a mere interest of a `Party’ in the fruits of a `litigation’, cannot be a `yardstick’ / `test’ for his being impleaded as a `Party’.

Excerpts of the order;

Discussions:

19. At the outset, this `Tribunal’ points out that in IA/584/2022 in Comp. App (AT) (CH) (INS) No. 269 of 2022, the Applicants have prayed for their  impleadment as `Respondent Nos. 4 to 7’ in the main `Appeal’ filed by the erstwhile `Liquidator’ of `The Jeypore Sugar Company Ltd.’. 

20. A mere perusal of the contents of IA/584/2022 filed by the `Applicants’ in Comp App (AT) (CH) (INS) No. 269 of 2022 clearly indicates that it is averred among other things, that `those who run the `School’ and who run the `Petrol Pump’ have been put to hardship, though IA/1155/2020 was filed before the `Adjudicating Authority’ by the `Workers Union’ stating that the `Trust’ is running the `School’ on the land leased out by the `Corporate Debtor’ to the `Educational Trust’ and the `Petrol Pump’ is run by the `Co-operative Society’ on the `Land’ leased out by the `Corporate Debtor’ and therefore, it was mentioned that the `Liquidator’, at best, can step into the shoes of the `Corporate Debtor’ as `Lessor’, but not to see them, evicted from the `School’ and also from the `Petrol Pump’, based on the `impugned order’ of the `Police protection’.

21. It is the plea of the `Applicants’ that because of the hardships caused by the `Liquidator’, if he is permitted to continue as the `Liquidator’, it will be an irreparable loss to the `company’, to the persons managing the `School’ and `Petrol Pump’, to the `Creditors’, and the `Shareholders’. As such, the `Applicants’ hardships shall also be heard, prior to the `adjudication’, as to the aspect of the `impugned order’, passed by the `Adjudicating Authority’ on 01.07.2022 is liable to be set aside or not, for which, they may be permitted by this `Tribunal’, to be arrayed as R8 and R9 in the instant Comp. App (AT) (CH) INS. No. 269 of 2022, on the file of this `Tribunal’.

22. Conversely, it is the contention of the `1st Respondent / erstwhile Liquidator’ that the IA/584/2022 and IA/585/2022, filed by the `Applicants’ in main Comp. App (AT) (CH) (INS) No. 269 of 2022, are liable to be dismissed, because of the fact that the `1st Respondent / IDBI Bank Officials’ (in main `Appeal’) and erstwhile `Promoters’ are hand in glove in subverting the system and process for achieving their illegal goals unmindful of the economic interest of our country. Further, the Bank Officials had disregarded the `Order of Interim Injunction’, passed by the `Hon’ble Madras High Court’ in WP No. 4458 of 2021 to achieve their illegal goals, etc. That apart, it is the stand of the `1st Respondent/erstwhile Liquidator’ that a `stranger’ cannot be permitted to meddle in any proceedings, unless he satisfies this `Tribunal’ that he falls within the purview of `Aggrieved Person’. Furthermore, only a person who had suffered or suffers from legal injury can assail the act / action / order, etc., in a `Court of Law’/`Tribunal’.

23. In effect, it is the contention of the `1st Respondent/erstwhile Liquidator’ that the two `Interlocutory Applications’ are to be dismissed by this `Tribunal’, since the `Applicants’ therein are not `necessary parties’ to be arrayed as the `Respondents’ in the main Comp. App (AT) (CH) (INS) No. 269 of 2022.

Appraisal:

# 24. It transpires that the `1st Respondent/erstwhile Liquidator’ in I.A. Nos. 584 & 585/2022 in Comp. App (AT) (CH) (INS) No. 269 of 2022 is the Appellant in main Comp. App (AT) (CH) (INS) No. 269 of 2022, as an `Aggrieved Person’, on being dissatisfied with the `impugned order’ dated 01.07.2022 in IA/815/IB/2020 in CP/1307/IB/2018, he has preferred the instant Comp. App (AT) (CH) (INS) No. 269 of 2022.

# 25. It comes to be known that the `1st Respondent/IDBI Bank’ in main Comp. App. (AT) (CH) (INS) No. 269 of 2022 has filed IA/815/IB/2020 in CP/1307/IB/2018 under Section 60 (5) of the I & B Code, read with Rule 11 of the NCLT Rules and Section 276 of the Companies Act, 2013 to remove the `Appellant / erstwhile Liquidator Mr. V. Venkatasivakumar’ of the Jeypore Sugar Company Ltd.

# 26. The Appellant/erstwhile Liquidator Mr. V. Venkatasivakumar, figured as Respondent in IA/815/IB/2020 in CP/1307/IB/2018, before the `Adjudicating Authority’ (NCLT, Division Bench – II, Chennai). The `Adjudicating Authority’ had allowed the IA/815/IB/2020, and appointed Mr. S. Hari Karthik as the `Liquidator’ of the `Corporate Debtor’ / `The Jeypore Sugar Company Ltd.’, by directing the erstwhile `Liquidator’ to handover the charges to the newly appointed `Liquidator’, within 7 days from the date of passing of the order.

# 27. In this connection, it is not out of place for this `Tribunal’ to make a pertinent mention that the `Applicants’ in IA/584/2022 in Comp. App (AT) (CH) (INS) No. 269 of 2022 before this `Tribunal’ has preferred Comp. App (AT) (CH) INS. 207 of 2022 against the erstwhile `Liquidator’ Mr. V. Venkatasivakumar, Appellant in Comp. App (AT) (CH) (INS) No. 269 of 2022 and 6 Others, as against the `Order’ passed by the `Adjudicating Authority’, NCLT, Chennai Bench in IA/229(CHE)/2021 in IA/1155/IB/2020 in CP/1307/IB/2018.

# 28. In reality, IA/229(CHE)/2021 in CP/1307/IB/2018, the Official Respondents Nos. 7 to 11 therein, were directed to provide Police protection to the `Liquidator’ (Mr. V. Venkatasivakumar) so as to enable him to discharge his duties as `Liquidator’. Arraying of Parties:

# 29. It must be borne in mind that there is no provision in the I & B Code, 2016, that enables the `Creditors’ other than those who triggered the `Insolvency Resolution Process’, to be impleaded as `Parties’. In law, the `Impleadment of Parties’, is ultimately, within the ambit of exercise of discretion by a `Tribunal’ / `Authority’, as the case may be. More importantly, no person, can be added, unless he is a `necessary party’. A `necessary party’ means that a person is very much necessary to the `Constitution’ of `Suit’ / an `Appeal’ in a given `Proceeding’ before a `Court of Law’ / `Tribunal’ / `Authority’. In fact, whether a person has an enforceable legal right is to be looked into by a `Tribunal’ in regard to the `impleadment of parties’. To array a person as a `prospective / proposed Respondent(s)’ is not a `Substantive Right’, but undoubtedly, it is one of the `procedure’ and the `Tribunal’ is to exercise its `judicial discretion’, of course, in a subjective manner, diligently.

# 30. It cannot be gainsaid that, an `Individual’ will not be added as a `Party’, just because he will be affected by the `Tribunal’ incidentally, when it passes an `Order’ in a given `proceedings’, before it.

# 31. An `Appellant / Plaintiff’ in a given legal proceeding is the `dominus litis’. He cannot be coerced to include a person as `Party” against whom, he does not want to contest, unless it is a compulsion of Law. It must be borne in mind that a `necessary party’ is one without whom no `Order’ can be passed effectively, in a given case. A `proper party’ is one in whose `absence’ an effective `Order’ can be made, but `whose presence is necessary’, for a complete and final decision on the `questions’, involved in a given `Proceeding’. Further, a mere interest of a `Party’ in the fruits of a `litigation’, cannot be a `yardstick’ / `test’ for his being impleaded as a `Party’.

# 32. Be that as it may, in the light of the aforesaid detailed discussions and in view of the fact that the main Comp. App (AT) (CH) (INS) No. 269 of 2022 is filed by the` erstwhile Liquidator, Mr. V. Venkatasivakumar’ as an `Appellant’ before this `Tribunal’, and he being the `1st Respondent’ in I.A. Nos. 584 and 585 of 2022, who assails the `impugned order’ dated 01.07.2022 in IA/815/IB/2020 in CP/1307/IB/2018, in and by which, he was directed to hand over the charge to the newly appointed `Liquidator Mr. Hari Karthik’, and also this `Tribunal’ keeping in mind the entire conspectus of the attendant facts and circumstances of the present case in a holistic fashion, comes to an inevitable and inescapable conclusion that the `Applicants’ in I.A. Nos. 584 and 585 of 2022 in Comp. App (AT) (CH) (INS) No. 269 of 2022 are not `necessary’/ `proper’ parties, to be arrayed as `Respondents’ in the main Comp. App. (AT) (CH) (INS) No. 269 of 2022 and even without their presence, this `Tribunal’ can `dispose of’ the main `Company Appeal’, of course, on merits, based on the `available material on record’. Viewed in that perspective, the I.A. Nos. 584 and 585 of 2022 filed by the `Applicants’ in Comp. App (AT) (CH) (INS) No. 269 of 2022 are devoid of merits.

Conclusion:

In fine, I.A. Nos. 584 and 585 of 2022 in Comp. App (AT) (CH) (INS) No. 269 of 2022 are dismissed. No costs.

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Sundaresh Bhatt, Liquidator of ABG Shipyard Vs. Central Board of Indirect Taxes and Customs - We hold that the respondent (Tax Authorities) could only initiate assessment or reassessment of the duties and other levies. They cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 or 33(5) of the IBC.

Supreme Court (26.08.2022) in Sundaresh Bhatt, Liquidator of ABG Shipyard Vs. Central Board of Indirect Taxes and Customs [Civil Appeal No. 7667 of 2021 ] held that;

• It is to be noted that the Customs Act and the IBC act in their own spheres. In case of any conflict, the IBC overrides the Customs Act. 

• We are of the clear opinion that the demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be.

• That the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim forrecovery or levy of interest on the tax due during the period of moratorium.

• “We hold that the respondent (Tax Authorities) could only initiate assessment or reassessment of the duties and other levies. They cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 or 33(5) of the IBC.

• In the present case, the demand notice dated 11.07.2019 was issued by the respondent under Section 72 of the Customs Act, in clear breach of the moratorium imposed under Section 33(5) of the IBC. Issuing a notice under Section 72 of the Customs Act for nonpayment of customs duty falls squarely within the ambit of initiating legal proceedings against a Corporate Debtor.

• Wherein authorities under the Customs Act have a limited jurisdiction to determine the quantum of operational debt – in this case, the customs duty – in order to stake claim in terms of Section 53 of the IBC before the liquidator. However, the respondent does not have the power to execute its claim beyond the ambit of Section 53 of the IBC.

Excerpts of the order;

# 1. The present Civil Appeal under Section 62(1) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) arises out of the impugned judgment dated 22.11.2021 passed by the National Company Law Appellate Tribunal, New Delhi (“NCLAT”) in Company Appeal (AT) (Insolvency) No. 236 of 2021. Vide the impugned judgment, the NCLAT has allowed the appeal filed by the respondent against the order of the National Company Law Tribunal, Ahmedabad (“NCLT”) /Adjudicating Authority whereby the Adjudicating Authority directed the release of certain goods lying in the Customs Bonded Warehouses without payment of custom duty and other levies.

 

# 2. A conspectus of the facts necessary for the disposal of the present appeal is as follows: ABG Shipyard (“Corporate Debtor”) was in the business of shipbuilding prior to the initiation of corporate insolvency proceedings against it. As a part of its business enterprise, it used to regularly import various materials for the purpose of constructing ships which were to be exported on completion. Some of these goods were stored by the Corporate Debtor in Custom Bonded Warehouses in Gujarat and Container Freight Stations in Maharashtra. Bills of entry for warehousing were submitted at the relevant time. The Corporate Debtor also took the benefit of an Export Promotion Capital Goods Scheme (“EPCG Scheme”) and was granted a license under the said scheme (“EPCG License”) with respect to the said warehoused goods.

 

# 3 On 01.08.2017, the National Company Law Tribunal, Ahmedabad (“NCLT”) passed an order commencing the Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor, and the appellant was appointed as the Interim Resolution Professional. In the same order, the NCLT also declared a moratorium under Section 13(1)(a) of the IBC.

 

# 4 On 21.08.2017, the appellant informed the respondent of the initiation of CIRP and sought custody of the warehoused goods and requested the respondent not to dispose of or auction the same. On 29.03.2019, the respondent for the first time, issued a notice to the Corporate Debtor regarding non-fulfilment of export obligations in terms of the EPCG license demanding customs duty of Rs. 17,13,989/- with interest. From 02.04.2019 to 07.04.2019, the respondent issued five different demand notices to the Corporate Debtor regarding nonfulfillment of export obligations under different EPCG licenses for various amounts. The details of the demand notices issued by the Respondent for non-fulfilment of EPCG License conditions by the Corporate Debtor are tabulated herein for ease of reference:

 

S. NO.	DATE	DETAILS OF DEMAND NOTICE	DEMANDED AMOUNT (PLUS INTEREST AS APPLICABLE)
1.	29.03.2019	EPCG License No. 5230007265 dated 16.07.2010	Rs. 17,13,989
2.	02.04.2019	EPCG License No. 5230008206 dated 16.11.2010	Rs. 96,20,325
3.	04.04.2019	EPCG License No. 5230007016 dated 17.05.2010	Rs. 53,29,072
4.	05.04.2019	EPCG License No. 5230007082 dated 03.06.2010	Rs. 2,05,73,402
5.	05.04.2019	EPCG License No. 5230006881 dated 31.03.2010	Rs. 6,64,646
6.	07.04.2019	EPCG License No. 5L32206936 dated 20.04.2010	Rs. 12,04,09,501

 

# 5 On 25.04.2019, the NCLT passed an order commencing liquidation against the Corporate Debtor under Section 33(2) of the IBC. Vide the said order, the NCLT declared that the earlier moratorium imposed under Section 13(1)(a) of the IBC shall cease to have effect by the operation of Section 14(4) of the IBC. However, a fresh direction was passed under Section 33(5) of the IBC barring the institution of any suit or legal proceeding by or against the Corporate Debtor. Further, the NCLT also appointed the appellant as the liquidator vide the same order.

 

# 6 Thereafter, the respondent filed claims before the appellant for goods warehoused in both Gujarat and Maharashtra on 20.05.2019, 27.05.2019 and 29.05.2019 under the IBC. On 27.06.2019, the appellant informed the respondent through its officers that liquidation proceedings had commenced against the Corporate Debtor and that the goods were to be released to the appellant.

 

# 7 Due to inaction by the respondent, the appellant filed I.A. No. 474 of 2019 before the NCLT under Section 60(5) of the IBC seeking a direction against the Respondent to release the warehoused goods belonging to the Corporate Debtor on 01.07.2019.

 

8 At this juncture, for the first time on 11.07.2019, the respondent issued a notice to the Corporate Debtor under Section 72(1) of the Customs Act for custom dues amounting to Rs. 7,63,12,72,645/- on 2531 Bills of entries. The respondent filed a concurrent claim for the said amount before the appellant under the IBC. Details of the amount claimed by the respondent before the appellant are as follows:

 

S. NO.	DATE	DETAILS OF CLAIMS FILED BY RESPONDENT BEFORE APPELLANT UNDER FORM C	CLAIMED AMOUNT (PLUS INTEREST AS APPLICABLE)
1.	20.05.2019	Non-fulfilment of obligations under 11 EPCG Licenses	Rs. 37,92,29,749
2.	27.05.2019	Non-fulfilment of obligations under 37 EPCG Licenses	Rs. 151,33,06,859
3.	29.05.2019	Non clearing of imported goods from Jawaharlal Nehru Port Trust, Nhava Sheva, Maharashtra	Rs. 22,70,50,898
4.	18.09.2019	Dues for all cargo in custom bounded warehouses in Gujarat	Rs. 763,12,72,645

 

# 9 On 25.02.2020, the NCLT allowed I.A. No. 474 of 2019 filed by the appellant and passed the following directions:

• “14) Therefore, the present IA deserves to be allowed. Accordingly, it is allowed in terms of its prayer clause as well as with following directions.

• i) The Respondents are directed to allow the applicant-liquidator to remove the Material, which is lying in the Customs Bonded Warehouses without any condition, demur and/ or payment of Customs Duty.

• ii) The Respondents are at liberty to lodge its claim with the Applicant-Liquidator with regard to the Customs Duty charges payable on the release of material, which form part of the assets of the Corporate Debtor company (in liquidation), before the Liquidator under the provisions of Insolvency and Bankruptcy Code, 2016 and in accordance with law.

• iii) The Customs Department shall allow removal of goods/material within two weeks, from the date of receipt of an authentic copy of this order from the Liquidator.

• iv) Meanwhile, the Respondents shall not proceed for auctioning, selling or appropriating the Materials owned by the Corporate Debtor company, for the purpose of recovery of its Customs Duty, which may tantamount to violation of the l&B Code and put the applicant/liquidator of the Corporate Debtor company (under liquidation) in disadvantageous position.”

 

# 10 The NCLT considered Section 238 of the IBC and held that the non-obstante clause in the IBC, being part of a subsequent law, shall have overriding effect on proceedings under the Customs Act. Further, looking to the waterfall mechanism under Section 53 of the IBC, the NCLT held that distribution of proceedings from sale of liquidation of assets shall also prevail over the Customs Act provisions. The NCLT held that, as Government dues, the claims by the respondent would have to be dealt with in accordance with Section 53 of the IBC. Apart from the above, the NCLT also placed reliance on a circular issued by the Central Board of Excise and Custom, being Circular No. 1053/02/2017-CX dated 10.03.2017 relating to Section 11E of the Central Excise Act, 1944. The abovementioned circular clarifies that dues under the Central Excise Act would have first charge only after the dues under the provisions of the IBC are recovered. As Section 142A of the Customs Act is pari materia with Section 11E of the Central Excise Act,1944, the NCLT applied the same rationale to interpret the said section in holding that the provisions of the IBC have priority.

 

# 11 Subsequent to the above judgment, the appellant sold the goods warehoused in Surat for a consideration of Rs. 169.11 crores. The sales process with respect to the goods warehoused in Dahej, Gujarat is currently ongoing, and is challenged before this Court in C.A. No. 7722 of 2021 and C.A. No. 7731 of 2021.

 

# 12 On 04.03.2021, the respondent filed an appeal before NCLAT challenging the order dated 25.02.2020 passed by the NCLT. On 22.11.2021, the NCLAT passed the impugned order, whereby it allowed the appeal filed by the respondent and set aside the directions of the NCLT requiring the respondent to release the warehoused goods to the possession of the appellant without seeking the custom dues. The NCLAT rather directed that the warehoused goods can be “released or disposed of as per Applicable Provisions of Customs Act by the Proper Officer”.

 

# 17 Aggrieved by the above judgment passed by the NCLAT, the appellant has filed the present Civil Appeal against the impugned judgment.

 

ANALYSIS

# 21 It must be noted that this question assumes significance as the warehoused goods belonging to the Corporate Debtor which is under liquidation, are sought to be sold by the Customs Authorities in lieu of custom dues. The respondent has relied on certain provisions of the Customs Act to assume such power. This has been vehemently opposed by the appellant herein, who has argued that once the insolvency process has been initiated against the Corporate Debtor, the IBC becomes squarely applicable and overrides any other enactment giving priority to the charges on the property.

 

# 40 From the above, it is to be noted that the Customs Act and the IBC act in their own spheres. In case of any conflict, the IBC overrides the Customs Act. In present context, this Court has to ascertain as to whether there is a conflict in the operation of two different statutes in the given circumstances. As the first effort, this Court is mandated to harmoniously read the two legislations, unless this Court finds a clear conflict in its operation.

 

# 41 At the cost of repetition, we may note that the demand notices issued by the respondent are plainly in the teeth of Section 14 of the IBC as they were issued after the initiation of the CIRP proceedings. Moratorium under Section 14 of the IBC was imposed when insolvency proceedings were initiated on 01.08.2017. The first notice sent by the respondent authority was on 29.03.2019. Further, when insolvency resolution failed and the liquidation process began, the NCLT passed an order on 25.04.2019 imposing moratorium under Section 33(5) of the IBC. It is only after this order that the respondent issued a notice under Section 72 of the Customs Act against the Corporate Debtor. The various demand notices have therefore clearly been issued by the respondent after the initiation of the insolvency proceedings, with some notices issued even after the liquidation moratorium was imposed.

 

# 42 We are of the clear opinion that the demand notices to seek enforcement of custom dues during the moratorium period would clearly violate the provisions of Sections 14 or 33(5) of the IBC, as the case may be. This is because the demand notices are an initiation of legal proceedings against the Corporate Debtor. However, the above analysis would not be complete unless this Court examines the extent of powers which the respondent authority can exercise during the moratorium period under the IBC.

 

# 43 In the above context, the judgment of this Court in S.V. Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, is extremely relevant. In that case, this Court, while expounding the interplay of Section 446 of the Companies Act 1956 (bankruptcy provision) with the Income Tax Act,1961, held as follows:

• “7. …Looking at the legislative history and the scheme of the Indian Companies Act, particularly the language of Section 446, read as a whole, it appears to us that the expression “other legal proceeding” in sub-section (1) and the expression “legal proceeding” in sub-section (2) convey the same sense and the proceedings in both the subsections must be such as can appropriately be dealt with by the winding up court. The Income Tax Act is, in our opinion, a complete code and it is particularly so with respect to the assessment and reassessment of income tax with which alone we are concerned in the present case. The fact that after the amount of tax payable by an assessee has been determined or quantified its realisation from a company in liquidation is governed by the Act because the income tax payable also being a debt has to rank pari passu with other debts due from the company does not mean that the assessment proceedings for computing the amount of tax must be held to be such other legal proceedings as can only be started or continued with the leave of the liquidation court under Section 446 of the Act. The liquidation court, in our opinion, cannot perform the functions of Income Tax Officers while assessing the amount of tax payable by the assessees even if the assessee be the company which is being wound up by the Court. The orders made by the Income Tax Officer in the course of assessment or reassessment proceedings are subject to appeal to the higher hierarchy under the Income Tax Act. There are also provisions for reference to the High Court and for appeals from the decisions of the High Court to the Supreme Court and then there are provisions for revision by the Commissioner of Income Tax. It would lead to anomalous consequences if the winding up court were to be held empowered to transfer the assessment proceedings to itself and assess the company to income tax. The argument on behalf of the appellant by Shri Desai is that the winding up court is empowered in its discretion to decline to transfer the assessment proceedings in a given case but the power on the plain language of Section 446 of the Act must be held to vest in that court to be exercised only if considered expedient. We are not impressed by this argument. The language of Section 446 must be so construed as to eliminate such startling consequences as investing the winding up court with the powers of an Income Tax Officer conferred on him by the Income Tax Act, because in our view the legislature could not have intended such a result.

• 8. The argument that the proceedings for assessment or reassessment of a company which is being wound up can only be started or continued with the leave of the liquidation court is also, on the scheme both of the Act and of the Income Tax Act, unacceptable. We have not been shown any principle on which the liquidation court should be vested with the power to stop assessment proceedings for determining the amount of tax payable by the company which is being wound up. The liquidation court would have full power to scrutinise the claim of the revenue after income tax has been determined and its payment demanded from the liquidator. It would be open to the liquidation court then to decide how far under the law the amount of income tax determined by the Department should be accepted as a lawful liability on the funds of the company in liquidation. At that stage the winding up court can fully safeguard the interests of the company and its creditors under the Act. Incidentally, it may be pointed out that at the Bar no English decision was brought to our notice under which the assessment proceedings were held to be controlled by the winding up court. On the view that we have taken, the decisions in the case of Seth Spinning Mills Ltd., (In Liquidation) (1962) 46 ITR 193 (Punj) (Supra) and the Mysore Spun Silk Mills Ltd., (In Liquidation) (1968) 68 ITR 295 (Mys) (supra) do not seem to lay down the correct rule of law that the Income Tax Officers must obtain leave of the winding up court for commencing or continuing assessment or reassessment proceedings.”

 

# 44 Therefore, this Court held that the authorities can only take steps to determine the tax, interest, fines or any penalty which is due. However, the authority cannot enforce a claim for recovery or levy of interest on the tax due during the period of moratorium. We are of the opinion that the above ratio squarely applies to the interplay between the IBC and the Customs Act in this context.

 

# 45 From the above discussion, we hold that the respondent could only initiate assessment or reassessment of the duties and other levies. They cannot transgress such boundary and proceed to initiate recovery in violation of Sections 14 or 33(5) of the IBC. The interim resolution professional, resolution professional or the liquidator, as the case may be, has an obligation to ensure that assessment is legal and he has been provided with sufficient power to question any assessment, if he finds the same to be excessive.

 

# 46 There is another aspect of this case that needs to be highlighted to portray the inconsistency of the Customs Act vis-à-vis the IBC during the moratorium period. In the present case, the demand notice dated 11.07.2019 was issued by the respondent under Section 72 of the Customs Act, in clear breach of the moratorium imposed under Section 33(5) of the IBC. Issuing a notice under Section 72 of the Customs Act for nonpayment of customs duty falls squarely within the ambit of initiating legal proceedings against a Corporate Debtor. Even under the liquidation process, the liquidator is given the responsibility to secure assets and goods of the Corporate Debtor under Section 35(1)(b) of IBC.

 

# 47 As laid down earlier, the Customs Act and IBC can be read in a harmonious manner wherein authorities under the Customs Act have a limited jurisdiction to determine the quantum of operational debt – in this case, the customs duty – in order to stake claim in terms of Section 53 of the IBC before the liquidator. However, the respondent does not have the power to execute its claim beyond the ambit of Section 53 of the IBC. Such harmonious construction would be in line with the ruling in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209, wherein a balance was struck by this Court between the jurisdiction of the NCLT under the IBC and the potential encroachment on the legitimate jurisdiction of other authorities.

 

# 48 However, it appears to us that in the impugned order, the NCLAT has misinterpreted the aforesaid judgment of this Court in Gujrat Urja Vikas Nigam Case (supra) and held as follows:

• “7.16 Thus, it is clear that NCLT and NCLAT cannot usurp the legitimate jurisdiction of other Courts, Tribunals and fora when the dispute does not arise solely from or relating to the insolvency of the corporate debtor. In the instant case, the Corporate Debtor had abandoned the imported goods in the Customs warehouses for several years and failed to pay the import duty and other charges and had not taken any steps to take possession of those goods for several years. Therefore, the importer had lost his right to the imported goods. Consequently, Customs Authorities are fully empowered under Section 72 of the Act to sell those goods to recover the Government dues. Liquidator has no right to take into possession over those goods for which the Corporate Debtors title is deemed relinquished by implication of law. Even before initiating the Corporate Insolvency Resolution Process, the Corporate Debtor company could not have secured the possession of the imported goods except by paying the Customs duty. Resolution Professional/liquidator, who virtually represents the company, cannot stand on a better footing than the Corporate Debtor itself.”

 

# 49 Such interpretation clearly ignores the fact that there was no “abandonment of goods” which would authorize the Customs Authorities to initiate the adjudicatory process to transfer title to themselves. Before any goods can be declared to have been “abandoned”, the same must be adjudged by some authority after due notice. The position cannot be assumed or deemed. In the case at hand, no such adjudication or notice has been placed on record to suggest that such abandonment of the warehoused goods had taken place prior to the imposition of the moratorium.

 

# 50 The NCLAT, by deciding the question of passing of title from the Corporate Debtor to the respondent authority, has clearly ignored the mandate of Section 72(2) of the Customs Act relating to sale. This interpretation of the NCLAT clearly ignores the effects of the moratorium under Sections 14 and 33(5) of the IBC. The fact is that the duty demand notice and notice under Section 72(2) of the Customs Act, were issued during the moratorium period, which has been completely ignored by NCLAT and has resulted in rendering the moratorium otiose.

 

# 51 The interpretation provided by the NCLAT, regarding the deemed transfer of title of the goods from the assessee to the Customs Authority under Section 72 of the Customs Act, would fly in the face of Section 14 of the IBC, read with Sections 25 and 33(5). Moreover, such deemed transfer cannot be countenanced in law as the same would be in breach of Article 300A of the Constitution, as properties are deemed to be transferred to the Customs Authority without there being adequate hearing or any adjudication of any form. Such an interpretation cannot be accepted by this court.

 

# 52 Interestingly, in the present case, on 20.05.2019, 27.05.2019, 29.05.2019 & 18.09.2019 the Customs Authorities filed Form C under Regulation 17 of IBBI Liquidation Process Regulation 2016 before the appellant/liquidator in order to stake claims for distribution of proceeds of sale in consonance with Section 53 of the IBC. The respondent authority, does a Uturn on filing such claims and instead, unilaterally decides to initiate recovery proceedings under Section 72(2) of the Customs Act. Further, the Customs Authority bypasses even the notice and adjudicatory requirements contemplated under Section 72(2) of the Customs Act and takes the position that there is a deemed transfer of title with respect to the assets as customs duty and other levies were not duly paid. Such a change in stance is clearly an afterthought, without there being any basis in law to bypass the specialized procedure laid down under the IBC.

 

# 53 For the sake of clarity following questions, may be answered as under:

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

• “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 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.

 

b) Whether the respondent could claim title over the goods and issue notice to sell the goods in terms of the Customs Act when the liquidation process has been initiated?

• answered in negative.

 

# 54 On the basis of the above discussions, following are our conclusions:

• i) 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 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.

• ii) After such assessment, the respondent authority has to submit its claims (concerning customs dues/operational debt) in terms of the procedure laid down, in strict compliance of the time periods prescribed under the IBC, before the adjudicating authority.

• iii) 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.

 

# 55 Resultantly, we allow the appeal and set aside the impugned order and judgment of the NCLAT. There shall be no orders as to costs.

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