Introduction

The Supreme Court of India, in the landmark case Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs (2022 INSC 871), addressed a critical issue concerning the interplay between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Customs Act, 1962. The case revolved around whether provisions of the IBC prevail over those of the Customs Act during the Corporate Insolvency Resolution Process (CIRP), particularly concerning the release and sale of warehoused goods subject to customs duties.

Summary of the Judgment

Sundaresh Bhatt, acting as the Interim Resolution Professional and later the Liquidator for ABG Shipyard Limited ("Corporate Debtor"), sought the release of goods stored in Customs Bonded Warehouses without the payment of due customs duties. The National Company Law Appellate Tribunal (NCLAT) had previously set aside an order by the National Company Law Tribunal (NCLT), allowing the Central Board of Indirect Taxes and Customs ("Respondent") to sell the warehoused goods to recover unpaid customs duties, arguing that these goods were not assets of the Corporate Debtor under the IBC due to neglect in fulfilling export obligations.

Upon appeal, the Supreme Court overturned the NCLAT's decision, affirming that the IBC's moratorium on legal proceedings takes precedence over other statutes, including the Customs Act. The Court held that the Respondent's actions to sell the goods violated the moratorium provisions of the IBC, thereby invalidating the NCLAT's order.

Analysis

Precedents Cited

The judgment references multiple precedents to elucidate the supremacy of the IBC over other laws. Notably:

• Swiss Ribbons Private Limited v. Union of India (2019) 4 SCC 17: Affirmed the primacy of the IBC in insolvency proceedings.
• S.V. Kondaskar v. V.M. Deshpande (1972) 1 SCC 438: Highlighted the limits of court intervention in assessing agency powers.
• Collector of Customs v. Dytron (India) Ltd., 1999 ELT 342 Cal.: Earlier stance on customs duties prevailing even during insolvency, which the Supreme Court found outdated.

Legal Reasoning

The Supreme Court's reasoning hinged on several legal principles:

• Moratorium Provisions of the IBC: Under Sections 14 and 33(5) of the IBC, once a moratorium is declared, prohibiting the initiation or continuation of legal proceedings against the Corporate Debtor, all other laws are subordinate to these provisions. This ensures a unified and streamlined insolvency process.
• Section 142A of the Customs Act: This section explicitly states that any sums payable under the Customs Act have a subordinate charge over the assets of a Corporate Debtor under the IBC. Hence, during insolvency proceedings, the IBC's recovery mechanisms take precedence.
• Overriding Effect of the IBC: Section 238 of the IBC mandates that its provisions override any inconsistent provisions in other laws, reinforcing the IBC's supremacy.
• Harmonious Interpretation: The Court emphasized the necessity of interpreting the IBC and Customs Act harmoniously, ensuring that the objectives of both legislations are met without conflict.

Impact

This judgment has far-reaching implications:

• Clarification of Legal Hierarchy: Establishes the IBC's provisions, especially moratorium clauses, as superior to other statutes like the Customs Act during insolvency proceedings.
• Protection of Corporate Insolvency Processes: Ensures that insolvency resolution processes are not derailed by external claims, providing stability and predictability in insolvency proceedings.
• Guidance for Liquidators and Resolution Professionals: Liquidators must prioritize the IBC's procedural frameworks over other legal obligations, ensuring compliance with the moratorium and recovery hierarchies prescribed by the IBC.
• Future Litigation: Sets a precedent for similar cases where conflicts between the IBC and other laws arise, potentially reducing judicial ambiguity and expediting insolvency resolutions.

Complex Concepts Simplified

Moratorium Under IBC

The moratorium is a protective shield that halts all legal actions against a Corporate Debtor once insolvency proceedings begin. Its primary purpose is to consolidate the debtor’s assets and facilitate an orderly insolvency process without external interferences.

Section 142A of the Customs Act

This section establishes that any dues under the Customs Act have a subordinate position compared to debts governed by the IBC. In essence, while the Customs Act can impose charges and recover dues, these actions cannot interfere with the insolvency process once it has commenced.

Swiss Challenge Process

A bidding process where an initial bid (Anchor Bid) is invited, followed by other bids that preferably exceed the Anchor Bid. This method ensures competitive pricing and maximum value retrieval during the sale of assets.

Conclusion

The Supreme Court's decision in Sundaresh Bhatt v. Central Board of Indirect Taxes and Customs unequivocally reinforces the IBC's supremacy over other legislations like the Customs Act during insolvency proceedings. By upholding the moratorium provisions, the Court ensures that insolvency resolution processes remain unchallenged and efficient, safeguarding the interests of all stakeholders involved. This judgment not only clarifies the legal hierarchy but also fortifies the IBC's framework, promoting a more robust and predictable insolvency regime in India.