{"id":424,"date":"2023-08-27T15:46:51","date_gmt":"2023-08-27T15:46:51","guid":{"rendered":"https:\/\/theleagle.in\/?p=424"},"modified":"2023-08-27T15:46:52","modified_gmt":"2023-08-27T15:46:52","slug":"supreme-court-reiterates-non-obstante-clause-of-section-529a-companies-act-1956","status":"publish","type":"post","link":"https:\/\/theleagle.in\/?p=424","title":{"rendered":"Supreme Court Reiterates Non-Obstante Clause of Section 529A, Companies Act, 1956"},"content":{"rendered":"<div id=\"bsf_rt_marker\"><\/div>\n<p>In a recent judgment<a href=\"applewebdata:\/\/D2EDEC75-EA6F-4055-A4B0-4F0E15CBB313#_ftn1\"><sup>[1]<\/sup><\/a>, the Supreme Court opined on the priority to be accorded to custom authorities vis-\u00e0-vis secured creditors under the Companies Act, 1956. It accorded due deference to the overriding nature of Section 529A under which tax due by a company under winding up is not to be the foremost payment. While the judgment is under the erstwhile Companies Act, 1956 it is important to highlight how a seemingly straightforward issue \u2013 ranking of tax dues from a company under the winding up or insolvency process &#8211; has a unduly long legacy that continues to simmer under the&nbsp;<a href=\"https:\/\/theleagle.in\/?p=390\">IBC<\/a>&nbsp;as well.&nbsp;<\/p>\n\n\n\n<p><strong>Introduction&nbsp;<\/strong><\/p>\n\n\n\n<p>The appeal before the Supreme Court was against an order of the Andhra Pradesh High Court where it held that notwithstanding the winding up order against the impugned company \u2013 M\/s Sri Vishnupriya Industries Limited \u2013 and Sections 529A and 530 of the Companies Act, 1956, the custom authorities have the first right to sell the imported goods and adjust the sale proceeds towards payment of customs duty. The appeal was filed by Industrial Development Bank of India from which the company had sought financial assistance and to which the company had hypothecated movable properties, namely machinery and its components.<\/p>\n\n\n\n<p>The company had imported the machinery and components and on failure to pay the customs duty, an order was passed to detain and sell the said property for satisfaction of the outstanding customs duty. In the meanwhile, an order for winding up of company was passed and the Official Liquidator so appointed requested the custom authorities to hand over the properties of the company which the latter planned to auction for payment of customs duty. The Andhra Pradesh High Court faced with the question as to whether the rights of a secured creditor should have precedence over custom authorities, decided in favor of the latter.&nbsp;&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<p><strong>Interplay of Provisions of Companies Act, 1956<\/strong><\/p>\n\n\n\n<p>Supreme Court was categorical, and rightly so, in its examination of Section 529A of Companies Act, 1956. It noted that Section 529A enlisted that workmen\u2019s dues and debts of secured creditors shall be paid in preference to all other payments, and the non-obstante clause in the provision made it clear that these payments were to be made in preference to all other payments in the winding up of a company. And all other payments enlisted in Section 530 were to be made subject to the prescription of Section 529A. Supreme Court concluded that it is \u2018beyond debate\u2019 that provisions of Section 529A shall prevail of Section 530 of the Companies Act, 1956. (para 11)<\/p>\n\n\n\n<p>The result of this clear and unambiguous position and effect of both provisions, was, in Supreme Court\u2019s own words:&nbsp;<\/p>\n\n\n\n<p>\u2026 I<em>DBI is an overriding preferential creditor under Section 529A of the Companies Act and at best, if the requirements of clause (a) to Section 530(1) of the Companies Act are satisfied, the customs dues would fall under Section 530 of the Companies Act and will be categorized as preferential payment<\/em>. (para 19)&nbsp;<\/p>\n\n\n\n<p>The Supreme Court, out of abundant caution, went into the meaning and interpretation of certain phrases used in Section 529A and Section 530, Companies Act, 1956. It went into detail and cited precedents as to what the terms \u2018due\u2019 and \u2018due and payable\u2019 mean under the provisions.&nbsp;<\/p>\n\n\n\n<p>The Supreme Court then clarified that as per the law laid down in relevant precedents, such as the&nbsp;<em>Dena Bank<\/em>case<a href=\"applewebdata:\/\/D2EDEC75-EA6F-4055-A4B0-4F0E15CBB313#_ftn2\"><sup>[2]<\/sup><\/a>, government dues do not have priority over secured creditors. The principle so enunciated in the&nbsp;<em>Dena Bank<\/em>&nbsp;case aligned with the Supreme Court\u2019s interpretation and interplay of Section 529A and Section 530 in the impugned case. However, the Supreme Court clarified that the principle laid down in the&nbsp;<em>Dena Bank<\/em>&nbsp;case must give way to a statutory charge that may be created by an enactment. In the context of impugned case, it meant that the Supreme Court had to examine if Customs Act, 1962 created a first charge for payment of customs duty and if there was a conflict between the Companies Act, 1956 and Customs Act, 1962. Supreme Court\u2019s conclusion on this point was:&nbsp;<\/p>\n\n\n\n<p><em>The provisions in the Customs Act do not, in any manner, negate or override the statutory preference in terms of Section 529A of the Companies Act, which treats the secured creditors and the workmen\u2019s dues&nbsp;as overriding preferential creditors; and the government dues limited to debts \u2018due and payable\u2019 in the twelve months next before the relevant date, which are to be treated as preferential payments under Section 530 of the Companies Act, but are ranked below overriding preferential payments 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.&nbsp;<\/em>(para 24)<\/p>\n\n\n\n<p>The Supreme Court further clarified that the charge created under Section 142A, Customs Act, 1962 protects the rights of third parties under Section 529A, Companies Act, 1956 inter alia of those under Insolvency and Bankruptcy Code, 2016. And that Section 142A, Customs Act, 1962 does not create a first charge on the dues payable under the said legislation.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<\/p>\n\n\n\n<p><strong>Conclusion<\/strong><\/p>\n\n\n\n<p>While the Supreme Court\u2019s judgment focuses on the interplay of provisions of Companies Act, 1956, its observations in the latter half of the judgment clarify, to some extent, the position of law after the implementation of IBC. The fact that Customs Act, 1962 does not create a statutory charge is an important and correct position of law as it clarifies that tax authorities \u2013 at least, customs authorities \u2013 are not placed above the preferential creditors. This may prove useful in unfortunate but frequent disputes between tax authorities seeking priority payment of outstanding dues over secured creditors of the company under insolvency, despite that the waterfall mechanism under IBC does not place the tax authorities above the secured creditors.&nbsp;&nbsp;<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><a href=\"applewebdata:\/\/D2EDEC75-EA6F-4055-A4B0-4F0E15CBB313#_ftnref1\"><sup>[1]<\/sup><\/a>&nbsp;<em>Industrial Development Bank of India v Superintendent of Central Excise and Customs and Others<\/em>, available at&nbsp;<a href=\"https:\/\/main.sci.gov.in\/supremecourt\/2009\/114\/114_2009_3_1501_46202_Judgement_18-Aug-2023.pdf\">https:\/\/main.sci.gov.in\/supremecourt\/2009\/114\/114_2009_3_1501_46202_Judgement_18-Aug-2023.pdf<\/a>&nbsp;(Last accessed on 21 August 2023).&nbsp;<\/p>\n\n\n\n<p><a href=\"applewebdata:\/\/D2EDEC75-EA6F-4055-A4B0-4F0E15CBB313#_ftnref2\"><sup>[2]<\/sup><\/a>&nbsp;<em>Dena Bank v Bhikhabhai Prabhudas Parekh &amp; Co and Others<\/em>&nbsp;(2000) 5 SCC 694.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>In a recent judgment[1], the Supreme Court opined on the priority to be accorded to custom authorities vis-\u00e0-vis secured creditors under the Companies Act, 1956. It accorded due deference to the overriding nature of Section 529A under which tax due by a company under winding up is not to be the foremost payment. While the &#8230; <a title=\"Supreme Court Reiterates Non-Obstante Clause of Section 529A, Companies Act, 1956\" class=\"read-more\" href=\"https:\/\/theleagle.in\/?p=424\" aria-label=\"Read more about Supreme Court Reiterates Non-Obstante Clause of Section 529A, Companies Act, 1956\">Read more<\/a><\/p>\n","protected":false},"author":2,"featured_media":425,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_themeisle_gutenberg_block_has_review":false,"cybocfi_hide_featured_image":"","footnotes":""},"categories":[11],"tags":[107,106,95,94,32],"class_list":["post-424","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-indirect_tax","tag-companies-act","tag-customs-act","tag-ibc","tag-ravpratapsingh","tag-supreme-court"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.9 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Supreme Court Reiterates Non-Obstante Clause of Section 529A, Companies Act, 1956 - TheLeagle | Eco Law Forum<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/theleagle.in\/?p=424\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Supreme Court Reiterates Non-Obstante Clause of Section 529A, Companies Act, 1956 - TheLeagle | Eco Law Forum\" \/>\n<meta property=\"og:description\" content=\"In a recent judgment[1], the Supreme Court opined on the priority to be accorded to custom authorities vis-\u00e0-vis secured creditors under the Companies Act, 1956. 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