ValkyaEditorial
Landmark Judgment

Sundaresh Bhatt, Liquidator of ABG Shipyard v. CBIC: moratorium, customs and the Section 238 override

On 26 August 2022 a three-judge bench of the Supreme Court, in Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs, held that once a moratorium is imposed under Section 14 or Section 33(5) of the Insolvency and Bankruptcy Code, the Customs Act yields to the IBC by force of Section 238. The Central Board of Indirect Taxes and Customs retains the power to assess and determine the quantum of customs duty payable, but cannot initiate recovery, sale or confiscation of the corporate debtor's goods during the moratorium; the customs claim must be filed before the IRP or liquidator and ranks in the Section 53 waterfall. A close reading of Chief Justice Ramana's judgment, the spheres-of-operation reasoning and the doctrinal arc through Paschimanchal.

Valkya Editorial· Legal Intelligence··12 min read
Court
Supreme Court of India
Citation
2022 SCC OnLine SC 1101
Bench
N.V. Ramana, C.J., J.K. Maheshwari, J., Hima Kohli, J.
Decided
26 August 2022
Provisions discussed
Insolvency and Bankruptcy Code 2016 s.14Insolvency and Bankruptcy Code 2016 s.33(5)Insolvency and Bankruptcy Code 2016 s.35(1)(b)Insolvency and Bankruptcy Code 2016 s.53Insolvency and Bankruptcy Code 2016 s.238Customs Act 1962 s.72Customs Act 1962 s.142A

Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs is the case in which the Supreme Court settled the operating relationship between the Customs Act, 1962 — a sectoral fiscal statute conferring on the customs authorities a graded suite of assessment, recovery, detention and confiscation powers — and the Insolvency and Bankruptcy Code, 2016 — a code creating a moratorium-protected resolution and liquidation architecture for distressed corporate debtors.

The three-judge bench of Chief Justice N.V. Ramana, Justice J.K. Maheshwari and Justice Hima Kohli heard the matter and delivered judgment on 26 August 2022. The lead judgment was authored by Chief Justice Ramana. The reasoning is structured around what the Court calls the spheres-of-operation principle — the two statutes operate within their own respective spheres; where they conflict in the post-moratorium context, the Code prevails by force of Section 238.

The case is the leading post-Code authority on the customs-IBC interface and is the structural precursor to the broader statutory-creditor waterfall jurisprudence that Paschimanchal Vidyut Vitran Nigam Ltd v. Raman Ispat Pvt Ltd (2023 INSC 625) carried forward in the electricity-dues context.

The architecture of the question

The Customs Act, 1962 confers on the customs authorities a layered set of powers in respect of imported goods. The assessment-stage powers (Sections 17, 18, 28) establish the customs-duty liability. The recovery-stage powers (Sections 142, 142A) operate to recover the assessed duty, with Section 142A authorising the sale of goods. The detention and confiscation powers (Sections 72, 110, 111) operate where goods are warehoused, duties are unpaid, or there has been a contravention. Each of these powers operates on the goods themselves rather than only on the importer in personam.

The IBC architecture, by contrast, operates on the corporate debtor's estate as a whole. Section 14 imposes a wide-ranging CIRP moratorium that bars the institution or continuation of suits or proceedings against the corporate debtor and the recovery of any property in the corporate debtor's possession. Section 33(5) extends the prohibition into the liquidation phase. Section 238 contains the non-obstante override — the Code prevails over any inconsistent provision of any other law.

Two questions had emerged. First, does the customs authority's exercise of recovery, detention and confiscation powers against the corporate debtor's goods after the moratorium fall within the Section 14 / Section 33(5) prohibition? Second, even if it does, is the assessment-stage power — the determination of the quantum of duty payable — affected, or does it survive the moratorium as part of the customs authority's independent statutory function?

The factual matrix

ABG Shipyard Ltd — a shipbuilder — was admitted to CIRP in August 2017 and entered liquidation in April 2019. Sundaresh Bhatt was appointed liquidator. Among the corporate debtor's assets were imported raw materials and inputs that had given rise to customs-duty liabilities; some were warehoused under the Customs Act framework, others had been imported but the duty had not been fully paid.

The Customs authorities — represented by the CBIC — had, in the period leading up to and following the moratorium, issued recovery notices for unpaid customs duty, initiated Section 72 proceedings to detain and sell certain warehoused goods, and initiated confiscation proceedings on certain consignments.

The liquidator sought a declaration from the NCLT that the Section 33(5) moratorium barred those recovery, detention and confiscation powers in respect of the corporate debtor's goods. The NCLT granted relief; the NCLAT reversed in material part, holding that the customs authorities' statutory powers were independent of the IBC moratorium. The liquidator appealed.

The reasoning

The Court's reasoning is structured around three propositions — the moratorium's textual reach, the Section 238 override, and the spheres-of-operation principle.

The moratorium's textual reach

The bench finds that the customs authorities' recovery, detention and confiscation actions fall within the textual scope of the moratorium.

Section 14(1)(a) prohibits the institution or continuation of suits or proceedings against the corporate debtor; the bench reads "proceedings" broadly to include statutory recovery proceedings under sectoral fiscal statutes. Section 14(1)(c) prohibits any action to foreclose, recover or enforce any security interest; the customs authority's Section 142A sale-of-goods action — exercised against a first-charge-on-goods position that is, in substance, a security-interest-like right — falls within this clause. Section 14(1)(d) prohibits the recovery of any property in the corporate debtor's possession; the detention and confiscation of warehoused goods in the corporate debtor's custody as importer falls within this clause as well. The textual reading captures the full recovery-and-enforcement dimension of the customs authority's powers.

The Section 238 override

Where the customs authority's actions are, on their own terms, authorised by the Customs Act but are barred by the IBC moratorium, Section 238 resolves the inconsistency in favour of the Code. The IBC's non-obstante clause is one of the broadest in Indian statutory drafting; the bench draws on the consistent post-IBC line — Innoventive Industries Ltd v. ICICI Bank (2017) on state moratorium statutes, Pr. Commissioner of Income Tax v. Monnet Ispat & Energy Ltd (2018) on income-tax recovery — that treats the IBC moratorium as the operative regime in the post-admission period.

The spheres-of-operation principle

The two statutes operate within their own respective spheres. The Customs Act governs the assessment, recovery, detention and confiscation of customs duties in the ordinary course; the IBC governs the resolution and liquidation of distressed corporate debtors. The customs authority's assessment-stage powers — the determination of the quantum of duty payable — fall outside the IBC's operational sphere and continue to operate during the moratorium. The customs authority is entitled to assess the duty payable on the corporate debtor's imported goods and to issue assessment-stage notices to the IRP or the liquidator.

What the customs authority cannot do — once the moratorium is imposed — is exercise its recovery, detention and confiscation powers against the corporate debtor's goods. Those powers operate within the IBC's sphere, and the Section 238 override applies.

The Customs Act and the IBC act in their own spheres. In case of any conflict, the IBC overrides the Customs Act.
— The Court

The bench draws the operational consequence. The customs-dues claim — once assessed by the customs authority — must be filed before the IRP or the liquidator as a claim in the CIRP or liquidation. The claim ranks in the Section 53 liquidation waterfall in the priority that the Code assigns to government dues. The customs authority cannot bypass the waterfall by exercising its recovery or sale powers against the goods directly.

The doctrinal contribution

The customs-IBC interface. The judgment supplies the definitive statement of the operating relationship between the Customs Act and the IBC. The assessment-stage / recovery-stage distinction is now the working analytical structure for the customs-IBC interface and has been applied by NCLT and NCLAT in subsequent matters.

The breadth of Section 238. The judgment reinforces the post-IBC line on the breadth of the non-obstante override. It operates not only against state moratorium statutes (Innoventive) and central tax-recovery provisions (Monnet Ispat) but against the customs framework — and, by extension, against any sectoral fiscal statute conferring recovery, detention or confiscation powers operating on the corporate debtor's estate.

The spheres-of-operation framing. The framing — that statutes can be reconciled by identifying their respective operational spheres — supplies a structured alternative to the bare clash-and-override analysis. The question is first whether the two statutes are operationally separate (in which case they coexist); only where they collide on the same operational ground does Section 238 engage. The framing has informed subsequent statutory-creditor cases including Paschimanchal Vidyut Vitran Nigam on the electricity-dues / IBC interface.

What the Court did not decide

The precise priority of customs dues in the Section 53 waterfall. The judgment establishes that the customs claim must enter the waterfall but does not detail its precise rank. Section 53(1)(e)(i) allocates the fifth-priority position to amounts due to the Central or State Government in respect of the two-year pre-liquidation period; whether customs dues qualify within that category — and the temporal cut-off for their inclusion — has been worked out in subsequent NCLT and NCLAT jurisprudence.

Customs duties on goods imported post-CIRP-admission. The judgment addresses goods imported pre-moratorium or warehoused at the time of moratorium. Duties on post-admission imports, made as part of the IRP's continued operation of the corporate debtor as a going concern under Section 20, typically form part of the CIRP costs under Section 5(13) and rank in the Section 53(1)(a) first-priority position; the moratorium analysis does not arise on the same terms.

Customs penalties and post-moratorium interest. The judgment is focused on the duty itself. The position of penalties for pre-moratorium non-compliance — and of interest accruing on unpaid duty during the moratorium period — was not directly engaged. The inferable principle is that pre-moratorium penalty liabilities form part of the claims to be filed before the IRP or liquidator; post-moratorium interest is more contested and turns on the underlying-debt characterisation in the plan or distribution.

The interface with allied statutes. The bench's framing is in terms of the Customs Act — Sections 72 and 142A in particular. Allied statutes operating alongside the customs framework — the Foreign Trade (Development and Regulation) Act, 1992, the Customs Tariff Act, 1975, and the Central Goods and Services Tax Act, 2017 in its import dimensions — are not directly addressed; the spheres-of-operation analysis transposes structurally but the application is case-by-case.

The doctrinal arc

The IBC override jurisprudence runs through several authorities.

Innoventive Industries Ltd v. ICICI Bank (2017) supplied the foundational Section 238 override in the state moratorium context — Parliament's IBC enacted under Entry 9 List III prevails over the inconsistent Maharashtra Relief Undertakings (Special Provisions) Act, 1958.

Pr. Commissioner of Income Tax v. Monnet Ispat & Energy Ltd (2018) extended the override to the central tax-recovery context — income-tax recovery proceedings against the corporate debtor's assets are barred by the IBC moratorium and Section 238.

Sundaresh Bhatt, Liquidator of ABG Shipyard v. CBIC (26 August 2022, three-judge bench) extended the analysis to the customs framework and supplied the spheres-of-operation framing.

State Tax Officer (1) v. Rainbow Papers Ltd (6 September 2022, two-judge bench) addressed a related but distinct question — whether a State VAT first-charge for tax dues qualifies as a "security interest" within the IBC definitions and brings the State within the "secured creditor" category for Section 53 waterfall purposes. Rainbow Papers held that it did, on the GVAT facts.

Paschimanchal Vidyut Vitran Nigam Ltd v. Raman Ispat Pvt Ltd (2023 INSC 625, 17 July 2023, two-judge bench of Bhat and Datta, JJ.) confined Rainbow Papers to its facts in the electricity-dues context, holding that electricity dues under the Electricity Act, 2003 cannot be enforced outside the IBC liquidation waterfall and that secured creditors rank ahead of government dues in the waterfall structure. Paschimanchal — while concerned with a different statute — drew structurally on the Sundaresh Bhatt spheres-of-operation framing.

The post-Sundaresh Bhatt practice has tended to apply the spheres-of-operation framing consistently across the family of sectoral fiscal and regulatory statutes that confer recovery, detention or confiscation powers operating on the corporate debtor's estate. The assessment / recovery distinction is the working sub-rule; the assessment power survives the moratorium, the recovery power does not.

The practitioner's take

For the IRP and the liquidator handling customs-exposed corporate debtors. Sundaresh Bhatt supplies the operational rule. Engage with the customs authority at the assessment stage; resist any recovery, detention or sale action initiated against the corporate debtor's goods during the moratorium — the Section 238 / Sundaresh Bhatt objection is doctrinally well-founded, and the NCLT will, on a prompt application, restrain the customs authority's recovery action. File the customs-dues claim in the CIRP or liquidation in the ordinary course.

For the CBIC and customs authorities. The post-Sundaresh Bhatt position is that the assessment-stage powers survive but the recovery-stage powers do not. The customs claim must be filed before the IRP or liquidator and pursued through the Section 53 waterfall. Recovery actions initiated during the moratorium are exposed to immediate NCLT restraint and any sale or confiscation may be set aside.

For the resolution applicant. The customs-dues exposure must be diligenced and dealt with in the plan. The haircut to which the customs claim is subject is, post-Ghanashyam Mishra v. Edelweiss ARC (2021), binding on the customs authority as a government creditor; the Essar Steel and Ghanashyam Mishra clean-slate rule extends to customs claims not specifically preserved in the plan.

For the NCLT and NCLAT addressing customs-IBC contests. The spheres-of-operation framing supplies the analytical structure. If the customs authority's action is assessment, the moratorium does not bar it. If recovery, detention or confiscation, the Section 238 override engages, the action is to be restrained, and the claim is to be filed in the CIRP or liquidation in the ordinary course.

Related reading

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On 9 August 2019 a three-judge bench of the Supreme Court, in Pioneer Urban Land and Infrastructure Ltd v. Union of India, upheld the 2018 Amendment to the Insolvency and Bankruptcy Code that deemed homebuyer advances 'commercial effect of borrowing' and thereby financial debt under Section 5(8)(f), held that IBC and RERA operate in different fields and co-exist harmoniously with Section 238 IBC controlling on conflict, and drew the doctrinal line between genuine allottees with possession intent and speculative investors seeking only refund or profit. A close reading of Justice Nariman's judgment, the constitutional analysis on Articles 14, 19(1)(g) and 300A, the field-occupation reasoning and what practitioners advising developers and homebuyers should take from the case.

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The Supreme Court's first substantive ruling on the architecture of the Insolvency and Bankruptcy Code 2016. A 2-judge bench held that the IBC, enacted under Entry 9 of List III, prevails over inconsistent State moratoria through *Section 238* read with Article 254; the *Section 7* admission enquiry is narrow — confined to whether a financial debt and default exist — and once those facts are made out the National Company Law Tribunal must admit, with no residual 'I deem fit' discretion. The decision framed the post-2016 'paradigm shift' away from debtor-in-possession, was diluted by *Vidarbha* in 2022, and was substantially restored by *M. Suresh Kumar Reddy* in 2023.

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On 12 July 2022 a two-judge bench of the Supreme Court, in Vidarbha Industries Power Ltd v. Axis Bank Ltd, read the word 'may' in Section 7(5)(a) of the Insolvency and Bankruptcy Code as conferring discretion on the adjudicating authority to refuse admission of an otherwise-eligible Section 7 application — an apparent dilution of the Innoventive 'mandatory-admission-on-proof-of-debt-and-default' rule. The reception was sharp; the review was dismissed; a coordinate bench in Maganlal Daga flagged the inconsistency; and a coordinate bench in M. Suresh Kumar Reddy v. Canara Bank confined Vidarbha to its facts. A close reading of the textual contrast between Sections 7(5)(a) and 9(5)(a), the APTEL-award factual matrix, and the doctrinal arc that has, in operational terms, restored Innoventive to its place.

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