Customs can't sell goods during insolvency, Supreme Court says
In a clash between IBC and Customs Act, the apex court holds that tax authorities must file claims like other creditors and cannot recover dues by selling warehoused goods during moratorium.
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In a clash between IBC and Customs Act, the apex court holds that tax authorities must file claims like other creditors and cannot recover dues by selling warehoused goods during moratorium.
A shipyard went bankrupt. Customs wanted to sell its imported steel to recover duty. The Supreme Court stopped them—but not for the reason you'd think.
ABG Shipyard, a shipbuilding company, had imported materials and stored them in customs bonded warehouses in Gujarat and Maharashtra. The steel sat there, uncleared, unpaid for—the plates beginning to rust in the coastal humidity. Then the company collapsed into insolvency in 2017, and by 2019, it was in liquidation. The liquidator walked into the warehouse and asked for the goods back—without paying customs duty. Customs said no. The steel, they argued, was abandoned. They had the right to sell it.
The question that landed before the Supreme Court was deceptively simple: When a company goes bankrupt, can tax authorities bypass the insolvency process and recover their dues by selling the company's goods sitting in a warehouse?
When the shipbuilder stopped paying
ABG Shipyard had imported raw materials for shipbuilding—steel plates, equipment, components—and stored them in customs bonded warehouses. Under the Customs Act, goods can be stored in these warehouses without paying duty until they are cleared for use. The company had to pay the duty eventually, but the cash was locked in ongoing projects.
Then the projects stopped. The company defaulted on loans. In August 2017, the National Company Law Tribunal (NCLT) in Ahmedabad admitted the insolvency petition and imposed a moratorium (a legal freeze on all recovery actions against the company). Two years later, in April 2019, the NCLT ordered liquidation, which triggered another moratorium under the Insolvency and Bankruptcy Code (IBC).
The liquidator, Sundaresh Bhatt, filed an application asking the NCLT to direct customs to release the warehoused goods. His argument: the IBC's moratorium barred customs from demanding payment or seizing assets. The goods belonged to the company, not to customs.
The demand notices that kept coming
Customs authorities did not agree. During the moratorium period, they issued demand notices to the liquidator, insisting on payment of customs duty. The stack of notices grew thick on the liquidator's desk, each one a fresh assertion of the government's claim. They argued that the goods had been warehoused beyond the permissible period under Section 61 of the Customs Act (the time limit for storing goods without clearing them). This, they said, meant the goods were deemed abandoned. Under Section 72 of the Customs Act (recovery through sale of warehoused goods), customs had the power to sell the goods and recover the duty from the sale proceeds.
The NCLT, Ahmedabad, sided with the liquidator in February 2020. It directed customs to release the goods without payment of duty. Customs appealed to the National Company Law Appellate Tribunal (NCLAT) in Delhi.
When the NCLAT changed everything
In November 2021, the NCLAT reversed the NCLT order. It held that the goods had been abandoned before the insolvency process even began. Since the warehousing period had expired long before the company entered insolvency, the title to the goods had already passed to customs. The goods, the NCLAT said, were no longer the company's property. The IBC's moratorium could not protect something the company no longer owned.
This was a dangerous ruling for every company that had goods sitting in customs warehouses. If the NCLAT was right, then any delay in clearing goods—even a delay caused by financial distress—could result in automatic loss of ownership. The liquidator appealed to the Supreme Court.
What the Supreme Court saw differently
The Supreme Court bench—Justice N.V. Ramana, Justice J.K. Maheshwari, and Justice Hima Kohli—heard the appeal in August 2022. The courtroom fell silent as the arguments turned on the clash between two laws: the IBC and the Customs Act.
The IBC has a non-obstante clause (an overriding provision that makes the code prevail over inconsistent laws) in Section 238, which says the IBC prevails over any other law that is inconsistent with it. The Customs Act also has a non-obstante clause in Section 142A, which says customs dues are a first charge on the property. Which one wins?
The liquidator argued that the IBC's moratorium under Sections 14 and 33(5) (the provisions that freeze all recovery actions during insolvency and liquidation) barred customs from selling the goods. Customs could assess the duty, but it could not recover it through sale or confiscation during the moratorium. Instead, customs had to file a claim as an operational creditor (a creditor owed money for goods or services) and wait for payment under the IBC's waterfall mechanism in Section 53 (the priority order for distributing liquidation proceeds).
Customs argued that its power to sell warehoused goods was not a recovery action—it was a consequence of the goods being abandoned. The company had lost title to the goods. The moratorium could not revive a right that no longer existed.
Why the deemed abandonment argument failed
The Supreme Court rejected the NCLAT's finding of deemed abandonment. The court held that the concept of deemed transfer of title from the company to customs under Section 72 of the Customs Act could not be countenanced during the moratorium. To accept it would violate Section 14 of the IBC, which expressly prohibits any action to recover or enforce security interests during the moratorium period.
More fundamentally, the court said, accepting the NCLAT's reasoning would violate Article 300A of the Constitution (the right to property). The court observed that "deemed transfer of title of goods from Corporate Debtor to Customs Authority under Section 72 Customs Act cannot be countenanced during moratorium as it would violate Section 14 IBC and Article 300A of Constitution." A company's goods cannot be taken away without following due process of law. The moratorium under the IBC is part of that due process. It creates a window during which all creditors—including tax authorities—must pursue their claims through the insolvency process, not through self-help.
The court also noted that the NCLAT's finding that the goods were abandoned before the insolvency process began was factually incorrect. The warehousing period had not expired before the moratorium was imposed. Even if it had, the court said, the moratorium would still protect the goods from being sold by customs.
The balance the court struck
The Supreme Court did not say customs had no rights. It said customs could assess the duty—determine how much was owed—during the moratorium. But it could not recover the duty by selling the goods or confiscating them. After assessment, customs had to submit its claim as an operational debt before the adjudicating authority (the NCLT) within the time periods and procedure set by the IBC.
The court also clarified that the liquidator could immediately secure the goods from customs. The liquidator did not have to pay the duty first. The goods would be dealt with under the IBC's waterfall mechanism. Customs would get paid, but only in its turn, behind secured creditors and ahead of unsecured creditors, depending on the priority under Section 53.
The court cited three precedents: S.V. Kondaskar v. V.M. Deshpande (AIR 1972 SC 878), which held that tax authorities cannot recover dues during liquidation without following the insolvency process; Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta ((2021) 7 SCC 209), which affirmed the primacy of the IBC's moratorium; and Collector of Customs v. Dytron (India) Ltd. (1999 ELT 342 Cal.), which dealt with customs powers during insolvency.
What this means for liquidators and tax authorities
The judgment settles a recurring tension in insolvency law. Tax authorities often argue that their statutory powers to recover dues—through sale, confiscation, or attachment—survive the moratorium. The Supreme Court has now made it clear: they do not. The IBC's moratorium is a complete bar on recovery actions, even by tax authorities. The only exception is assessment—determining the quantum of tax owed—which can proceed during the moratorium.
THE PLAY: If you are a liquidator and customs is holding your company's goods, file an application before the NCLT directing customs to release the goods immediately—you do not need to pay the duty first; customs must file its claim like every other creditor.
The court ended where it began: with steel in a warehouse, the smell of salt air and rust, and a question about who gets to sell it.
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