Customs can assess, but can't sell: Supreme Court shields liquidation estate.

When the Customs Officer Knocks on a Liquidator’s Door

ABG Shipyard was once a giant. It built vessels, imported materials, and stored them in customs-bonded warehouses. Then it collapsed. In 2017, the National Company Law Tribunal (NCLT), Ahmedabad, admitted the company into the Corporate Insolvency Resolution Process (CIRP). A moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) kicked in. Two years later, when no resolution plan materialised, the NCLT ordered liquidation under Section 33(2) and a fresh moratorium under Section 33(5).

The liquidator, Sundaresh Bhatt, faced a problem. The customs authorities had warehoused goods belonging to the corporate debtor. They wanted their duties. They wanted to sell the goods. The liquidator wanted the goods released without paying a rupee. The stakes were enormous: if customs could recover its dues by selling the goods, the liquidation estate would shrink, and the waterfall under Section 53 of the IBC—the priority ladder for creditors—would be disrupted. The Supreme Court of India had to decide: who wins when the IBC moratorium meets the Customs Act’s power to sell?

The Warehouse Standoff

The facts were straightforward. ABG Shipyard imported materials and stored them in customs-bonded warehouses. When the company went into liquidation, the goods were still there. The customs authorities, acting under Sections 72 and 142A of the Customs Act, 1962, demanded payment of customs duties and threatened to sell the goods to recover the dues. The liquidator moved an application before the NCLT, Ahmedabad, on 25 February 2020, seeking the release of the goods without payment of customs duty.

The NCLT agreed with the liquidator. It directed the customs authorities to release the goods and file their claims under the IBC. The customs authorities appealed to the National Company Law Appellate Tribunal (NCLAT), New Delhi. On 22 November 2021, the NCLAT reversed the NCLT order. It held that the goods were deemed abandoned by the corporate debtor and that the customs authorities were empowered to sell them under the Customs Act. The liquidator appealed to the Supreme Court.

What Each Side Argued

The liquidator’s counsel argued that the moratorium under Sections 14 and 33(5) of the IBC prohibited any recovery action by the customs authorities. The IBC, they said, overrides the Customs Act by virtue of Section 238 of the IBC. The customs authorities could only assess the duty and file a claim as an operational creditor under the IBC waterfall mechanism. They could not sell the goods or confiscate them.

The customs authorities countered that the Customs Act is a special statute. Section 142A of the Customs Act declares that any duty payable under the Act shall be the first charge on the goods. They argued that the goods were abandoned by the corporate debtor under Section 72 of the Customs Act, which allows the proper officer to sell goods that are not removed from the warehouse within the prescribed period. The NCLAT had accepted this argument, holding that the title to the goods had passed to the customs authorities.

The Supreme Court’s Answer

The Supreme Court, in a judgment authored by Justice N.V. Ramana and concurred by Justice J.K. Maheshwari and Justice Hima Kohli (who wrote a separate concurring opinion), allowed the appeal. It set aside the NCLAT judgment and restored the NCLT order.

The Court held that once a moratorium is imposed under Sections 14 or 33(5) of the IBC, the customs authority has limited jurisdiction. It can assess and determine the quantum of customs duty and levies. But it cannot initiate recovery by sale or confiscation under the Customs Act. The customs authority must submit its claims as an operational debt through the IBC procedure, in compliance with the prescribed time periods, before the adjudicating authority under Section 53 of the IBC.

The Court also held that the IRP, RP, or liquidator can immediately secure the goods from the customs authority to be dealt with appropriately under the IBC. There can be no deemed transfer of title of goods from the corporate debtor to the customs authority under Section 72 of the Customs Act during the moratorium, as it would violate Section 14 of the IBC and Article 300A of the Constitution.

The Doctrine That Mattered

The core of the judgment is the interplay between the IBC moratorium and the Customs Act’s recovery powers. The Court applied the principle from S.V. Kondaskar v. V.M. Deshpande (AIR 1972 SC 878), where it was held that income tax authorities can assess tax but cannot enforce recovery during a winding-up. The Court applied this analogously to the IBC: customs can assess but cannot recover during the moratorium.

The Court also relied on Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta ((2021) 7 SCC 209) for the proposition that a balance must be struck between the NCLT’s jurisdiction under the IBC and the legitimate jurisdiction of other authorities. The Court corrected the NCLAT’s misinterpretation of this case.

The NCLAT had relied on Collector of Customs v. Dytron (India) Ltd. (1999 ELT 342 Cal.), which held that customs duty carries a first charge even during insolvency under the Companies Act, 1956. The Supreme Court distinguished this case, holding that the reliance was inappropriate because Section 142A of the Customs Act had legislatively overruled the position in Dytron. The Court clarified that Section 142A does not give customs a priority over the IBC waterfall; it only creates a charge that must be enforced through the IBC process.

THE PLAY: When a corporate debtor is under IBC moratorium, customs authorities can assess duty but cannot sell or confiscate goods. The liquidator must secure the goods and the customs authority must file a claim as an operational creditor under Section 53 of the IBC.

Why the NCLAT Got It Wrong

The NCLAT had held that the goods were deemed abandoned by the corporate debtor and that the customs authorities could sell them. The Supreme Court rejected this finding. It held that before goods can be declared abandoned, the same must be adjudged by some authority after due notice. The position cannot be assumed or deemed. The Court observed that a deemed transfer of property to the customs authority without hearing or adjudication would breach Article 300A of the Constitution, which protects the right to property.

The Court also noted that the NCLAT’s finding of deemed abandonment violated the moratorium under Section 14 of the IBC. The moratorium prohibits any action to recover or enforce any security interest created by the corporate debtor. A deemed transfer of title to the customs authority would be such an action.

What This Means for Practitioners

This judgment is a clear win for liquidators and resolution professionals. It establishes that the IBC moratorium is a powerful shield against recovery actions by statutory authorities, including customs. The key takeaway is that customs authorities cannot bypass the IBC process by selling goods or confiscating them. They must file their claims as operational creditors and wait for their turn in the waterfall.

For customs authorities, the judgment is a reminder that the IBC overrides the Customs Act. Section 142A of the Customs Act does not give them a super-priority. They must participate in the IBC process like any other creditor.

For founders and CFOs of companies in distress, this judgment provides clarity. If your company is under IBC moratorium, the customs authorities cannot seize your goods. You can secure them and deal with them under the IBC. The customs duty is a debt that must be settled through the IBC waterfall, not through a summary sale.

The Bottom Line

When the IBC moratorium is in force, customs authorities can assess duty but cannot sell or confiscate goods; the liquidator must secure the goods and the customs authority must file a claim as an operational creditor under Section 53 of the IBC.