Strategic interactions between Customary Law and Insolvency and Bankruptcy Code

In all communities, human behavior is regulated by the customs of the country, whereas in terms of law customs act as the earliest source of legal authority in India. But with the advancement of time, and the face-paced process of globalization, things seem to be evolving at an immeasurable speed hence the applicability of customary law is starting to fade away, whereas the practice and applicability of the new modern law, is becoming the need of the hour to deal with the current day problems.

Many years back India was struck with piles of defaults in debt cases and the law present at that time was not able to provide fair enough solutions and was failing badly. It was soon also realized that mere debt recovery will not exactly inflict the damage being inflicted via the Non-Performing Assets (NPA’s), hence making it the need of the hour to find a more realistic and long-lasting solution to deal with this problem. Hence a brand new regulation i.e the Insolvency and Bankruptcy Code, 2016 (IBC) became enacted on 28 May 2016 and came into force. The Introduction of IBC in the year 2016 has been a great step that has helped to reform the insolvency law landscape in India to a great extent. IBC came into force as powerful legislation with solutions to deal with the NPA trouble along with making sure that a wholesome credit score goes with the flow inside the economic system, which the old customary laws were not able to fulfill at their best. Post the implementation of IBC, as consistent with the World Bank’s data India’s rank in resolving insolvency went from 136 in 2017 to 52 in the year 2020 and seems to only be improving with time.

The Indian legislative framework defines the scope and sphere of each legislation. All of them work under a particular sphere and are confined to the powers stated in their provisions. However, there are several legislations that come into interplay and maintain a harmonious relationship. Similar has been the situation between the Insolvency and Bankruptcy Code and Customs Act. Both acts work in their own spheres and have powers and regulations stated amongst them. The judgment has specified the main provisions of the both act which also states the interplay with other statutes. The overriding effect of IBC is only statute that follows the rule against Customs act.

Recently, on 26th August 2022, the apex court in the case of Sundaresh Bhatt, Liquidator of ABG Shipyard Vs Central Board of Indirect Taxes and Customs, held that IBC will prevail over the Customary Act to the extent that if the moratorium proceedings which is the waiting period set by an authority, commence, then, in that case, the customary law will not have the power to call for any action of recovery for dues or claim title over the goods as well as cannot issue notice to sell the goods in cases of liquidation against the corporate debtor under the terms and regulations of the Customs Act. as, the role of customs act works in another sphere that sometimes collides with other legislations.

This observation by the apex court was made by the bench comprising Chief Justice N.V. Ramana, Justices JK Maheshwari, and Hima Kohli. It was also brought into consideration that in the case where the moratorium is declared under the Bankruptcy Code, even then the customary laws will have limited jurisdiction to assess the quantum and that they can’t take steps for recovery of dues, as IBC, being the more recent statute, overrides the Customs Act. Apart from this, there stands many legal and fundamental reasons that are followed in the present judgment. The arguments of the counsels have also made many of the legislative aspects of both the acts more clear.

The recent judgment has stated the prevailing position of IBC over the Customs Act. In 2017, an order was passed by the National Company Law Tribunal, Ahmedabad. It declared a moratorium under Section 13(1)(a). Section 13(1)(a) of IBC states the declaration of the moratorium for the purposes that are stated in Section 14 of the code. Moratorium refers to the legal authorization that is provided to the debtors for postponing the payment. Moratorium, in the present case, plays a vital role in defining the overriding effect of the code.

Another important aspect here is the initiation of CIRP. CIRP is the Corporate Insolvency Resolution Process which stands as a recovery mechanism for creditors. In the present scenario, CIRP was initiated with the permission of the Interim Resolution Professional. In regards to this, it was stated that warehouse goods must be taken into custody and no auction must be initiated for the same. This states that the procedure of moratorium was being followed as declared by NCLT.

However, in the year 2019, a notice was issued by the customs authority. It was regarding the non-fulfillment of export obligations by the Corporate Debtor. In furtherance, the same, five notices were issued regarding the same issue. This stands against the order passed by NCLT. In furtherance of this scenario, the judgment has been passed by the apex court declaring the positions of the IBC and Customs Act.

The positions of both acts have been clarified. It has been clearly stated by the bench that once the proceedings have been initiated under Section 14 or 33(5) of the IBC, the customs act cannot be bought into action. This limits the powers of authorities under Customs Act and due to the same, in the present case, the decision of NCLAT has been challenged. It has been stated that the IBC is a recent statute as compared to the customs Act. Also, the reference has been given to Section 142A of the Customs Act.

Section 142A of the Customs Act states that the Customs authorities would have the first and foremost charge over the assets of an assessee. However, this is an exception to the cases that are under the purview of the Companies Act 1956, Recovery of Debts Due to Banks and Financial Institutions Act 1993, SARFAESI Act, 2002, and the IBC, 2016”. In the present scenario, NCLT had already passed the order as per IBC. Hence it is due to this, that the customs authorities cannot commence acting against the debtor.

The exceptions that are stated in the section 142A of the Customs Act can also be found in Section 238 of IBC. Also, it clearly mentions that Section 238 overrides any of the provisions of other legislations which is inconsistent with the provisions of IBC. Following the given provisions, the following judgment sets a precedent to be followed in further cases too. As, in the present case, once the CIRP proceedings were initiated as per provisions of IBC, the issuance of notices stands void. This is because the same overrides the provisions of IBC that is again void in nature.

The Bench while pronouncement the judgment has stated that “issuance of notices by the respondents were plainly in the teeth of section 14 of the Code”. As they were done after the initiation of CIRP proceedings and this stands against the statutory provisions. Therefore, respondents have no right to claim goods by issuing various notices.

The decision of the apex court is based on two major aspects- overriding clauses and moratorium in IBC. Firstly, Section 238 of the code is facilitated by Sections 245 to 255 of the code. These provisions deal with the amendments of the other statutes and the overriding effects that they can over the code. As the main objective of IBC is to secure the maximized value of assets of the Corporate Debtor. The IBC states for time-bound resolution of the insolvency issues. As, with the initiation of CIRP, the Committee of Creditors gets control over the corporate debtor. This process is also time bound and after that duration, either the entity is revived or liquidation of the same begins. This also includes the calm period that is provided under IBC.

Another important aspect that follows is the moratorium as specified under Section 14 of the code, it is a principle. This applies in various instances including a company that goes into liquidation. This is an important aspect to be included because the provision of the customs act includes not only the IBC but, other acts too. Codes and acts such as IBC, Companies act, work in cooperation with each other and that is why also provides for a speedy trial. All such instances and provisions specify the necessity and application of IBC over the Customs act.

The IBC has certainly revived the insolvency regime in India. It has been very successful in combating the developing threat of NPAs, however, it has additionally benefited the economy in a plethora of ways. As in line with reports, a total of Rs. 2.5 lakh crores has been brought back into the banking system from 2016 upon the decision of insolvencies beneath IBC. There is a long way beforehand for the Indian insolvency regime to meet various other global challenges.

The main aim of the enactment of IBC was to have a clear and fresh start for the Indian industry. This was for providing opportunities to the market players for fair competition in the market. Also, to have a defined and restricted procedure for the initiation of proceedings. Following of the present case states the importance of IBC in the corporate structure too. As, many of the legislations interplays with the code, it is necessary to look after the overriding provisions of the statute. Therefore, the present judgment plays a vital role in defining and simplifying the process of liquidation. Also, this stands as a specified procedure to be followed by corporate debtors too.

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