Legal principle

Government dues under the Customs Act, even when preferential under Section 530 of the Companies Act, do not override the overriding preferential payments under Section 529A, so prior secured creditors may enforce their charge notwithstanding dues under the Customs Act.

Court decision

The appeal was allowed and the full bench judgment dated 26 August 2008 was set aside; the Official Liquidator's application (C.A. No. 906/2004) was treated as allowed, and the auction sale proceeds deposited in Court with accrued interest were directed to be paid to the Official Liquidator for distribution in accordance with Sections 529A and 530 of the Companies Act. The Court held that prior secured creditors are entitled to enforce their charge notwithstanding government dues payable under the Customs Act, and expressly overruled Dytron (India) Ltd.

Facts

IDBI had financed M/s Sri Vishnupriya Industries Ltd., which imported machinery and components from Italy in 1998-1999 and stored the goods (128 wooden containers) in a private bonded warehouse under a bond in terms of Section 59(1) of the Customs Act. The goods were not cleared for home consumption under Section 47 even after the extended warehousing period, so customs issued show-cause notices and orders-in-original confirmed customs duty of Rs. 3,27,22,191 and Rs. 10,48,29,017. On non-payment, customs passed orders dated 19 December 2000 and 27 February 2002 under Section 72(2) read with Section 142 for detention and sale of the warehoused goods. The company was ordered to be wound up on 1 December 2003; the Official Liquidator's application for possession succeeded before a single judge but the Andhra Pradesh full bench held customs had the first right to sell the goods, prompting IDBI, as prior secured creditor, to appeal to the Supreme Court.

Key provisions

• Section 142A, Customs Act, 1962 — Liability under Act to be first charge 
• Section 68, Customs Act, 1962 — Clearance of warehoused goods for home consumption
• Section 72(2), Customs Act, 1962 — Goods improperly removed from warehouse, etc
• Section 46, Customs Act, 1962 — Entry of goods on importation
• Section 142, Customs Act, 1962 — Recovery of sums due to Government
• Section 59(1), Customs Act, 1962 — Warehousing bond
• Section 47, Customs Act, 1962 — Clearance of goods for home consumption
• Section 15(1), Customs Act, 1962 — Date for determination of rate of duty and tariff valuation of imported goods