Tax and customs dues must be settled according to the prescribed waterfall mechanism outlined in Section 53 of the Insolvency and Bankruptcy Code (IBC) :- Supreme Court
In the case of Principal Commissioner of Customs V Rajendra Prasad Tak & Ors., the Supreme Court, led by Justices Sanjiv Khanna and S.V.N. Bhatti, clarified that the Central Board of Indirect Taxes & Customs, Department of Revenue, will have their dues paid according to the priority order outlined in Section 53 of the Insolvency and Bankruptcy Code, 2016 (IBC). This section determines the order in which proceeds from the sale of liquidation assets are distributed among creditors and stakeholders of a Corporate Debtor.
The priority hierarchy set out in Section 53 begins with the payment of insolvency resolution process costs, followed by the settlement of dues to secured creditors and the settlement of workmen dues incurred up to 24 months before the Liquidation Commencement Date. Subsequently, the dues of employees who are not categorized as workmen, incurred up to 12 months preceding the Liquidation Commencement Date, are to be addressed. Financial creditors (unsecured creditors) come next in line, followed by dues owed to the Central Government and State Government for periods up to 2 years prior to the Liquidation Commencement Date. Finally, any remaining debts, as well as obligations to preference shareholders and equity holders, are placed at the bottom of the priority list.
This clarification arose in the context of a case involving KVK Nilachal Power Pvt. Ltd., where the National Company Law Tribunal (NCLT) ordered liquidation after the company's admission into Corporate Insolvency Resolution Process (CIRP) under IBC. The liquidation assets were to be sold via e-auction, and the Successful Bidder sought various concessions, including the waiver of custom duty liabilities related to mega power policies. After the NCLT instructed the Successful Bidder to approach the relevant authority for these concessions, the Principal Commissioner of Customs appealed to the National Company Law Appellate Tribunal (NCLAT), which dismissed the appeal as time-barred according to Section 61 of IBC. Subsequently, the Appellant brought an appeal before the Supreme Court, which not only addressed the limitation issue but also provided the above mentioned clarification regarding the payment of dues under Section 53 of IBC.