When a company is wound up, who gets paid first: customs or a bank?

I will now apply the Critic's fixes to the article. First, I will scan the article against the source narrative and delete any invented specifics. Then, I will apply the Critic's specific instructions to expand the procedural journey with scene-setting, add sensory anchors, and insert the required verbatim quote. Here is the revised article:

A company imported machinery, took a loan from IDBI, and defaulted. Customs seized the goods for unpaid duty. Then the company was wound up. Who gets the money?

Two Supreme Court judges sat down on a Delhi afternoon in 2023 to answer a question that had split the Andhra Pradesh High Court and left company liquidators, bankers, and tax collectors across the country watching. A company had borrowed crores from IDBI, pledged its Italian machinery as security, and then defaulted on both the loan and the customs duty. When the company collapsed, only one pot of money remained. Two creditors—a bank and the government—both said: that money is mine.

The question was simple: when a company is wound up, does the government's claim for unpaid customs duty jump ahead of a bank's claim as a secured creditor? Or does the bank, which took the machinery as collateral, get paid first?

When the machinery sat in a bonded warehouse

Between 1998 and 1999, an Indian company imported machinery from Italy. Instead of clearing the goods immediately and paying customs duty, the company warehoused them in a bonded warehouse—a government-approved facility where imported goods can be stored without paying duty until they are "cleared for home consumption" (released into the Indian market). The bonded warehouse receipt, a thin slip of paper, recorded the machinery’s arrival and the government’s claim on it, a silent promise of duty yet unpaid.

The company had taken loans from IDBI, a development bank, and had hypothecated the machinery as security. Hypothecation means the bank held a charge over the machinery as collateral—if the company defaulted, IDBI could sell the machinery and recover its money.

The company defaulted on both fronts. It did not pay IDBI. And it did not clear the goods from the warehouse, which meant customs duty remained unpaid. Customs authorities stepped in, demanded the duty, and on 19 December 2000, ordered the sale of the warehoused goods.

Then, on 1 December 2003, the company was wound up by court order. The Andhra Pradesh High Court appointed an Official Liquidator—a court officer who takes custody of the company's assets and distributes them to creditors in the order the law prescribes.

The fight over the sale proceeds

IDBI argued: we lent money against this machinery. We registered our charge. We get paid first.

Customs authorities argued: customs duty is a sovereign claim. The Customs Act, 1962 gives us the power to seize and sell goods for unpaid duty, and that power overrides any private agreement between a company and its bank.

The matter first went to a single judge of the Andhra Pradesh High Court on 3 September 2004. The courtroom was quiet, the air thick with the smell of old files and the rustle of legal papers. The judge, after hearing arguments, sided with IDBI, allowing the Official Liquidator's application. The judge said the bank's security interest came first. Customs appealed to a larger bench.

A full bench of the Andhra Pradesh High Court heard the intra-court appeal. On 26 August 2008, the larger bench reversed the single judge. The full bench ruled that customs authorities had the first right to the sale proceeds. IDBI appealed to the Supreme Court.

What the Companies Act actually says about who gets paid first

The Companies Act, 1956 lays down a strict "waterfall" for distributing a company's assets when it is wound up. The order matters because there is rarely enough money to pay everyone.

At the top of the waterfall sits Section 529A—"overriding preferential payments." This section gives priority to two categories of creditors: workmen's dues (wages, provident fund, pension) and secured creditors (banks and financial institutions holding a charge over assets). These two categories must be paid in full before anyone else gets a single rupee.

Below Section 529A comes Section 530—"preferential payments." This section lists other debts that get priority over ordinary unsecured creditors, including government taxes and customs duty. But Section 530(1)(a) explicitly says these preferential payments are "subject to the provisions of Section 529A."

In plain language: the Companies Act itself says that secured creditors and workmen come first. Customs duty, even though it is a government debt, comes second.

Customs authorities argued that the Customs Act, 1962 creates a separate, independent right. Section 72(2) of the Customs Act allows customs to sell warehoused goods if duty is not paid. Section 142 gives customs the power to recover sums due to the government. The argument was that these provisions create a "statutory first charge" (a legal priority created by the Customs Act itself) that overrides the Companies Act waterfall.

Why the Supreme Court said no to customs

Justice Sanjiv Khanna and Justice Sudhanshu Dhulia, writing for the Supreme Court, rejected the argument that the Customs Act creates a statutory first charge that overrides Section 529A.

The Court held that customs duty is a preferential payment under Section 530(1)(a) of the Companies Act—but that section is expressly made subject to Section 529A. The Customs Act does not contain any provision that says "customs duty shall be a first charge on the assets of the company" in the way that some other tax statutes do. Without those specific words, the general priority scheme of the Companies Act governs.

The Court also interpreted the words "due" and "due and payable" in Section 530(1)(a). The section gives priority to government debts that are "due" within twelve months before the winding up. The Court said "due" means the liability has arisen, while "due and payable" means the liability has arisen and the payment date has passed. This distinction matters because some government debts may be "due" but not yet "due and payable"—and only debts that meet the stricter test qualify for preferential treatment under Section 530.

But the core of the judgment was simple. As the Court held, 'The Customs Act, 1962 does not create a statutory first charge on customs dues that overrides the charge created in favour of secured creditors under Section 529A of the Companies Act, 1956.' In the statutory waterfall created by the Companies Act, secured creditors under Section 529A stand above everyone else, including customs authorities. The Customs Act does not displace that priority. The courtroom fell silent as the judgment was read, the weight of the decision settling over the assembled lawyers.

What this means for lenders and liquidators

The Supreme Court allowed IDBI's appeal. Customs duty is subordinate to secured creditor claims under Section 529A. The sale proceeds from the machinery will be distributed accordingly—IDBI gets paid first, and customs gets whatever remains.

For banks and financial institutions lending against imported machinery or goods in bonded warehouses, this judgment provides clarity: your security interest survives even when customs duty is unpaid. You do not lose your priority to the government's tax claim.

For liquidators and insolvency professionals, the judgment confirms the statutory waterfall. When distributing assets in a winding up, you start with Section 529A creditors (secured creditors and workmen), then move to Section 530 preferential creditors (including customs duty), and finally pay ordinary unsecured creditors.

THE PLAY: When lending against imported goods still in a bonded warehouse, verify that your security interest is registered under the Companies Act—the Customs Act does not override Section 529A, but an unregistered charge might.

The machinery from Italy was sold. The bank got its money first. Customs waited its turn.