Case Number: Civil Appeal No. 2568 of 2013

Name of Judges: Hon’ble Judges Sanjiv Khanna and Sudhanshu Dhulia

Order Date: 18.08.2023

Facts of the Case:

• The case involves an appeal by the Industrial Development Bank of India (IDBI) against a judgment dated August 26, 2008 (Original side Appeal No. 1 of 2005) by the Andhra Pradesh High Court involving the issue of priority right in selling imported goods after a winding-up order against a company.
• The company (M/s. Sri Vishnupriya Industries Ltd. (in liqn.) and Others) received financial assistance from IDBI (Appellant) between 1994 and 2000, using securities, one of which is the machinery and components imported from Italy during 1998-1999 and stored in a private bonded warehouse under Section 59(1) of the Customs Act. Due to non-clearance within the timeframe, customs duty was levied, leading to attempted sales by customs authorities by powers u/s 72(2) r/w Sec 142 of Customs Act. 
• Meanwhile, the company filed petition for winding up and was then wound up vide order passed on 1st Dec 2003 by AP HC, and the Official Liquidator claimed possession of goods for auction. The single judge ruled in favor of the Official Liquidator, but customs authorities appealed. The full bench ruled that customs authorities’ rights supersede secured creditor claims.
• The Appellant further filed an appeal in this Court, and pending the outcome, a status quo was maintained. Thereafter, vide order dated 5th October 2017, the customs authorities, along with the appellant – IDBI and the Official Liquidator, were permitted to sell the goods subject to deposit of the auction sale proceeds with the Registry of this Court.

The Hon’ble Supreme Court Observed and Held as Follows:

• The Court observed that Section 529A of the Companies Act was enforced by Act No. 35 of 1985 with effect from 24th May 1985. Therefore, when there is a clash and disagreement between section 529A of the Companies Act and another provision of the Companies Act or any other enactment in force on 24th May 1985, Section 529A prevails and the debts are to be paid in terms of Section 529A and also that Section 530 is subject to provisions of Section 529A of the Companies Act.
• In light of this, the Bench subsequently noted that 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 rank pari passu with the workmen’s dues, are to be paid in priority to all other debts. Therefore, the taxes, cesses and rates due to the Central and State governments or local authorities under Clause (a) to Section 530(1) of the Companies Act cannot be given priority over the payments/debts mentioned in Section 529A of the Companies Act.
• The Hon’ble Court while interpreting Section 530, relied on the case of Rajratha Naranbhai Mills Co. Ltd., where this Court agreed with the views expressed by D.A. Desai, J. in Sales Tax Officer, Petlad, and held that the words debt ‘due’ occurring in the first part and the words debt ‘due and payable’ in the latter part of Section 530(1)(a) of the Companies Act are different expressions meant to convey different and not the same meaning. Further it was by the Court, “The customs duty became ‘due and payable’ prior to twelve months next to the ‘relevant date’; the ‘relevant date’ being the date of winding up of the Company on 1st December 2003 as per subclause (i) to clause (c) to sub-Section (8) to Section 530 and will not be covered under clause (a) to Section 530(1) of the Companies Act. The amount ‘due and payable’ in terms of the two adjudication orders dated 15th September 2000 and 10th October 2000 would, therefore, not fall in the category of preferential payments under clause (a) to Section 530(1) of the Companies Act and will rank pari passu with ordinary or unsecured creditors, without any preferential treatment.”
• The appeal was allowed and the impugned judgment dated 26th August 2008 in Original Side Appeal No. 1 of 2005 by the Andhra Pradesh HC was set aside and Company Application No. 906 of 2004 filed by the Official Liquidator in Company Petition No. 168 of 2002 was treated as allowed. The sale proceeds deposited in the Court and converted into fixed deposit receipts, along with the interest accrued thereon, was ordered to be paid to the Official Liquidator which is then to be distributed in accordance with the provisions of Sections 529A and 530 of the Companies Act. The case was disposed with no order as to costs.