TaxTMI 
TaxTMI 
2023 (8) TMI 945
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....ms Act' and adjust the sale proceeds towards payment of customs duty. 2. The Company, during the period 1994-2000, was granted and availed of financial assistance from the appellant - IDBI. As a security, the Company had hypothecated movable properties and created equitable mortgage of immovable properties by depositing title deeds. The charge was duly registered with the Registrar of Companies. In addition, the promoters and guarantors had furnished personal guarantees. 3. In the present case, we are concerned with the hypothecated movable property, namely, machinery and its components, imported from Italy during the years 1998-1999. The goods, packed in 128 wooden containers, were warehoused in a private bonded warehouse by executing bond in terms of Section 59(1) of the Customs Act. The goods were initially warehoused for one year, which period was extended. However, as the goods were not cleared for home consumption in terms of Section 47 of the Customs Act, even after expiry of the extended period of warehousing, show-cause notices were issued Show Cause Notices dated 17th February 2000 and 10th April 2000, and after considering the explanation given by the Company, orde....
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...., the Official Liquidator was duty bound to take into his custody and control all properties, effects and actionable claims, including the movable property, that is, the imported goods. Official Liquidator, as the custodian of all the properties of the Company, functions under the directions of the Company Court. Any person making any claim against the Company has to prove his claim before the Official Liquidator by placing necessary material in support. Accordingly, the submission regarding the custom authorities' entitlement and right under the Customs Act to sell the imported goods to realise their dues was rejected. 5. On the customs authorities preferring an intra-court appeal, the mater was referred to the full bench of the Andhra Pradesh High Court on the question of whether the claim of a secured creditor has precedence over the right of the customs authorities to recover the customs duty. The full bench, relying on and approving the ratio of the Calcutta High Court in Collector of Customs v. Dytron (India) Ltd. 1998 SCC OnLine Cal 674, disagreed with the view expressed by a full bench of the Madras High Court in UTI Bank Ltd. v. Deputy Commissioner of Central Excise and....
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.... Section 529-A, there shall be paid in priority to all other debts- (a) all revenues, taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8) and having become due and payable within the twelve months next before that date; (b) all wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date, subject to the limit specified in sub-section (2); (c) all accrued holiday remuneration becoming payable to any employee, or in the case of his death to any other person in his right, on the termination of his employment before or by the effect of, the winding up order or resolution; (d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, all amounts due, in respect of contributions payable during the twelve months next before the relevant date....
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....less the assets are insufficient to meet them, in which case they shall abate in equal proportions; and (b) so far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge. (6) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given by clause (d) of sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise prescribed. (7) In the event of a landlord or other person distraining or having distrained on any goods or effects of the company within three months next before the date of a winding up order, the debts to which priority is given by this section shall be a first charge on the goods or effects so distrained on, or the proceeds of the sale thereof: Provided that, in respect of....
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....ment in force on 24th May 1985, Section 529A prevails and the debts are to be paid in terms of Section 529A of the Companies Act. 9. As per clause (b) of sub-Section (1) to Section 529A of the Companies Act, the debts due to secured creditors to the extent such debts under clause (c) of the proviso to sub-Section (1) to Section 529 Clause (c) to the proviso to Section 529 has been quoted subsequently rank pari passu with the workmen's dues The expression 'Workmen's dues' in Sections 529, 529A and 530 of the Companies Act is defined and restricted under sub-section (3)(b) to Section 529 of the Companies Act, are to be paid in priority to all other debts. Sub-section (2) to Section 529A states that the debts payable under clauses (a) and (b) of sub- Section (1) to Section 529A shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. 10. In the present case, we are not required to examine the inter-play and principle of proportionality with reference to clauses (a) and (b) to Section 529A of the Companies Act, albeit we must give full effect to and enforce the non-obstante nature of Section 529A of the Companies....
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....nding up and, therefore, the 'relevant date', in the absence of appointment of a provisional liquidator, would be the date on which the winding up order was passed against the Company, which is 1st December 2003 The Official Liquidator was appointed by the High Court vide the order dated 1st December 2003 in Company Petition No. 168 of 2002. 13. Again, before we proceed to interpret the expressions debt 'due' and debt 'due and payable' in clause (a) to Section 530(1) of the Companies Act, it is relevant to take note of the effect of Sections 447, 456, 468, 528 and 529 of the Companies Act, as well as the object and purpose behind these provisions. The relevant sections read as follows: "447. Effect of winding up order.- An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on all the joint petition of a creditor and of a contributory." "456. Custody of company's property-(1) Where a winding up order has been made or where a provisional liquidator has been appointed the liquidator or the provisional liquidator, as the case may be, shall take into his custody or under....
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.... certain value." "529. Application of insolvency rules in winding up of insolvent companies.- (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to- (a) debts provable; (b) the valuation of annuities and future and contingent liabilities; and (c) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: Provided that the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen's portion therein, and where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security,- (a) the liquidator shall be entitled to represent the workmen and enforce such charge; (b) any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen's dues; and (c) so much of the debt due to such secured creditor as could not be realised by him by virtue of ....
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....surers as is mentioned in Section 14 of the Workmen's Compensation Act, 1923, rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under Civil Appeal No. 2568 of 2013 Page 17 of 38 the said Act in respect of the death or disablement of any workman of the company; (iv) all sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company; (c) "workmen's portion", in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen's dues bears to the aggregate of- (i) the amount of workmen's dues; and (ii) the amounts of the debts due to the secured creditors." 14. As per Section 447 of the Companies Act, an order for winding up of a company operates in favour of all the creditors as if it had been made on a joint petition of a creditor. All creditors are treated as petitioning creditors. Section 456 of the Companies Act requires a provisional liquida....
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.... assets so assimilated, according to the waterfall mechanism provided for and specified under Sections 529, 529A and 530 of the Companies Act. Accordingly, and with this objective, Section 529A of the Companies Act refers to the doctrine of pari passu in the proviso to sub-section (1) to Section 529, with reference to the claims inter se the workmen and the secured creditors. Even otherwise, on a conspectus of these sections, the principle applicable and underlying these provisions is to stop alienation and preserve the assets on the date of the bankruptcy, which date, in some cases, can relate back to the date of filing of the winding up petition, as in case of execution of a decree. This preservation is with a view to ensure the division and application of the assets of the company being wound up, as it stood on the relevant date. See - In Re Savin, [1872] L.R. 7 Ch. App. 760, 764 The payment must be made in terms of the priority prescribed. 17. This Court in J.K. (Bombay) (P) Ltd. v. New Kaiser-I-Hind Spg. and Wvg. Co. Ltd. (1970) 40 Comp Cas 689 has held that once a winding up order is passed, the assets of the company under liquidation are passed under the control of the li....
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....ing. Therefore, for a government debt to be covered under clause (a) to Section 530(1) of the Companies Act, it must not only be a debt 'due', but it must also be a debt 'due and payable' within twelve months next before the relevant date. The requirements of the latter portion of clause (a) to Section 530(1) of the Companies Act are dual and cumulative, which is debt 'due and payable', and not one that is 'due'. The debt 'due' must have become payable at any time within twelve months next before the relevant date. The debt 'due and payable' prior to twelve months next to the relevant date is not a preferential debt in terms of Section 530(1)(a) of the Companies Act. Such debt will rank pari passu with ordinary or unsecured creditors, without any preferential treatment. In this regard, we quote the following passages from the decision of this Court in Rajratha Naranbhai Mills Co. Ltd. (supra): "8. We have gone through both the judgments aforereferred to very carefully and minutely and have heard learned counsel on the conflicting decisions. There are wide ranging discussions in the interpretative process relating to the word 'due' occurring in the earlier part of the provi....
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....legal philosophy which permeates the provision, the same Civil Appeal No. 2568 of 2013 Page 24 of 38 being that the debts due and payable, so as to claim priority, must be appropriated to the period within 12 months next before the relevant date and their liability for payment must be founded during that period and no other. To put it in simpler words, the State has a priority over debts, liability and obligation of which was born within the time frame of those twelve months and as such due and becoming due and payable within those twelve months next before the relevant date, ascertainable if necessary later, if not already ascertained. We are in respectful agreement with the interpretation put by the Court of Appeal to Section 264 of the English Companies Act in Airedale Garage case, analogous as it is to the provision in hand, warranting the same interpretation; more so when any other interpretation would lead to the results feared by the Company Law Committee extracted above. In such view of the matter, we need not elaborately comment, discuss or demolish, sentence by sentence, the reasoning given by the Single Bench as also the Division Bench of the High Court towards interpret....
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....reates a first charge overriding the charge in favour of the secured creditor, namely, the appellant - IDBI. 20. This Court in Dena Bank (supra), while examining the issue of priority of government dues or Crown debts over the dues of other creditors, opined that the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The common law principles of equity and good conscience, as applicable in India and the common law of England, do not accord the government or Crown dues a preferential right for recovery of dues or debts over a mortgagee, pledgee of goods or a secured creditor. The common law doctrine giving preferential rights to the Crown debts confined to ordinary or unsecured creditors constitutes 'law in force' within the meaning of Article 372(1) of the Constitution of India, and accordingly, this law continues to be in force. This Court in Dena Bank (supra) specifically refers to and approves the statement of law made in 'Rashbehary Ghose: Law of Mortgage' TLL, 7th Edn., p. 386 - "It seems a government debt in India is not entitled to precedence over a prior secured debt." This principle also emanates from....
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....by presenting electronically on the customs automated system to the proper officer a bill of entry for home consumption or warehousing in such form and manner as may be prescribed: Provided that the Principal Commissioner of Customs or Commissioner of Customs may, in cases where it is not feasible to make entry by presenting electronically on the customs automated system, allow an entry to be presented in any other manner: Provided further that if the importer makes and subscribes to a declaration before the proper officer, to the effect that he is unable for want of full information to furnish all the particulars of the goods required under this sub-section, the proper officer may, pending the production of such information, permit him, previous to the entry thereof : (a) to examine the goods in the presence of an officer of customs, or (b) to deposit the goods in a public warehouse appointed under Section 57 without warehousing the same. (2) Save as otherwise permitted by the proper officer, a bill of entry shall include all the goods mentioned in the bill of lading or other receipt given by the carrier to the consignor. (3) The importer shall ....
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....rescribed form; (b) the import duty, interest, fine and penalties payable in respect of such goods have been paid; and (c) an order for clearance of such goods for home consumption has been made by the proper officer: Provided that the order referred to in clause (c) may also be made electronically through the customs automated system on the basis of risk evaluation through appropriate selection criteria: Provided further that the owner of any warehoused goods may, at any time before an order for clearance of goods for home consumption has been made in respect of such goods, relinquish his title to the goods upon payment of penalties that may be payable in respect of the goods and upon such relinquishment, he shall not be liable to pay duty thereon: Provided also that the owner of any such warehoused goods shall not be allowed to relinquish his title to such goods regarding which an offence appears to have been committed under this Act or any other law for the time being in force." The goods were not released on non-payment of customs duty etc. and, thereupon, show cause notices dated 17th February 2000 and 10th April 2000 were issued....
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.... and have to be paid after the payment has been made in terms of Section 529 and 529A of the Companies Act. Therefore, the prior secured creditors are entitled to enforce their charge, notwithstanding the government dues payable under the Customs Act. 25. The view and the ratio we have expressed is in consonance with the decision of this Court in Punjab National Bank v. Union of India and Others (2022) 7 SCC 260. A similar view has also been expressed by a three judges' bench of this Court in Sundaresh Bhatt, Liquidator of ABG Shipyard v. Central Board of Indirect Taxes and Customs (2023) 1 SCC 472, with references to the provisions of the Insolvency and Bankruptcy Code, 2016 For short, 'IBC' and the Customs Act. In this context, the three judges' bench in Sundaresh Bhatt, Liquidator of ABG Shipyard (supra) has referred to Section 238 of the IBC to observe that Section 238 of the IBC clearly overrides any provision of law which is inconsistent with the IBC. This judgment has also made reference to Section 142A of the Customs Act, which reads thus: "142A. Liability under Act to be first charge.- Notwithstanding anything to the contrary contained in any Central Act or Sta....
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....ytron (India) Ltd. (supra) was referred to in Sundaresh Bhatt, Liquidator of ABG Shipyard (supra), wherein this Court observed that reliance of the National Company Law Appellate Tribunal on Dytron (India) Ltd. (supra) was not appropriate as such interpretation has been legislatively overruled by the inclusion of Section 142A in the Customs Act. We wish to clarify, as held above, that the decision in Dytron (India) Ltd. (supra) does not lay down the correct law, as even earlier, the position in law was that the debt 'due and payable', when it falls within the four corners of clause (a) to Section 530(1) of the Companies Act, would be treated as preferential payment, but it would not override and be given preference over the payments of overriding preferential creditors covered under Section 529A of the Companies Act. 27. We must also examine the decision of this Court in Imperial Chit Funds (P) Ltd. v. Income Tax Officer, Ernakulam (1996) 8 SCC 303, wherein this Court has interpreted the legal effect of Section 178 of the Income Tax Act, 1961 For short, 'Income Tax Act', which was enacted pursuant to the report of the Company Law Reforms Committee. On interpretation of Section 1....