The court established that a secured creditor has priority over the Customs Department for recovery of its dues, but may be liable to meet customs dues as a successor of the defaulting importer for specific goods imported under exemption from customs duty. The court also clarified that the State Financial Corporations Act, 1951 and the Customs Act, 1962 are both special enactments, and in the absence of a conflict, the question of one prevailing over the other did not arise.

Anand Byrareddy J.—These petitions are heard together and are disposed of by this common order as the issues that arise for consideration are common to all cases.

2. The Petitioner in all the petitions is Karnataka State Industrial Investment and Development Corporation Limited (hereinafter referred to as 'the KSIIDC'), it is a financial Corporation as defined under the State Financial Corporations Act, 1951 (hereinafter referred to as 'the Act').

3. The common Respondents represent the Government of India and the Department of customs.

4. The other Respondents are entities whose units have been taken over by the Petitioner and certain third parties who intend to purchase assets brought to sale in terms of Section 29 of the Act, by the Petitioner.

5. The facts in each petition are briefly stated here before considering the issues that arise;

In Writ Petition No. 17111/2001, the facts are as follows;

Respondent No. 3, a private limited company obtained financial assistance from the Petitioner to set up an Industry to manufacture electronic toys. The said company obtained an import licence as a 100% export oriented unit (EOU). The Petitioner had granted to Respondent No. 3 a term loan of Rs. 134.85 lakh on the security of hypothecation of movable assets including machinery which the said Respondent intended to import. The unit failed and defaulted in repaying the loan, from inception. Consequently, the Petitioner, in exercise of powers under Section 29 of the Act, took over the assets as on 18-4-1998.

6. The aforesaid Respondent had, as an 100% Export Oriented Unit, availed of the benefit of a scheme envisaged by the Department of Customs. The unit was exempt from payment of customs duty on imported machinery subject to the condition that the unit was to carry on manufacture within a bonded area and to export its entire production for a fixed period of ten years. The unit had executed a bond in favour of the Customs Department that if it failed to fulfill the obligations it would be liable to pay the applicable duty and penalty on such imported machinery. The machinery imported by the said Respondent Company was valued on Rs. 1.05 Crore attracting a duty of over Rs. 87.00 lakh. Since, the unit failed to meet its export obligation the Deputy Commissioner of Customs, Bangalore had raised a demand for Rs. 87.53 lakhs as duty and had duly confirmed the same by an order dated 26-11-1999.

7. The Customs Department duly intimated the Petitioner that it seeks to recover the duty payable in respect of the said machinery, vide letter dated 14-2-2001.

8. The Petitioner, on the other hand, claims that the defaulting Respondent was due a total sum of Rs. 2.62 Crore and since, the unit was taken over by the Petitioner and hence the Customs Department could not claim any priority on the sale proceeds of the said machinery. The Customs Department contends that an obligation having been created in respect of the goods, even if the Petitioner claims to have taken over the goods, the same cannot be sold or otherwise dealt with without dis-charging the liability of duty and penalty.

9. In Writ Petition No. 23586 of 2001, Respondent No. 3 therein had established a 100% Export Oriented Unit engaged in the manufacturing of watch straps and bracelets. It had obtained term loans totalling to Rs. 90 lakh for the Petitioner. To secure the due repayment, land and buildings were mortgaged and movable assets hypothecated in favour of the Petitioner as per the deed dated 11-3-1988. The loan amount was to be utilized for purchase of imported machinery. The unit failed and was closed down in the year 1993. In September 1994 though the unit was taken over by Respondent No.4 and sought to be revived, the unit did not function. The Petitioner was thus compelled to take over the unit on 24-1-1997. The Petitioner thereafter found a third party purchaser who was willing to purchase the entire unit comprising of land, building and machinery. This was to the knowledge of t