Madras HC: No GST Liability on Director If it is Not Provable That the Company is Unable to Pay During Liquidation Proceedings

The recent ruling by the Madras High Court states that the director isn’t responsible for paying GST if it’s unclear whether the company can settle the dues during liquidation proceedings.

During an inspection at SKMPL’s factory, State GST Officers seized documents leading to a show cause notice issued under Section 74 of the CGST & SGST Act on 15.06.2020, demanding recovery of input tax credit and taxes for the year 2018-19.

K. Malathi, the petitioner, sought legal advice and learned that she lacked the authority to represent SKMPL after the NCLT’s liquidation order. Consequently, she didn’t respond to the notice. The first respondent informed the Official Liquidator but received no response or appearance for the hearing.

As a result, the first respondent passed one-sided orders demanding substantial taxes, interest, and penalties from SKMPL. The petitioner fears being held accountable for these charges. Hence, the Writ Petition.

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The petitioner’s counsel argued that the orders were issued in the company’s name during liquidation, a fact known to the first respondent. With the Official Liquidator’s appointment, the petitioner couldn’t engage in responding, and the Official Liquidator failed to participate in the proceedings, leading to the one-sided orders. Thus, the petitioner seeks to invalidate these orders as they lack sustainability.

Section 88(3) of the CGST Act introduces the concept of vicarious liability for Directors of the debtor company. It stipulates that if a private company undergoes liquidation and any tax, interest, or penalty remains unpaid as per this Act, the Directors of said debtor company are jointly and severally responsible for paying these dues.

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A Justice on a Single Bench noted that if the company in liquidation lacks funds, making it impossible to recover the sales tax dues from the company itself, a new legal basis emerges to seek these dues from the former Directors of the company in liquidation.

In the current scenario, the matter concerning the unavailability of funds with the Official Liquidator for settling claims is pending determination.

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Consequently, as of now, there is no legal basis to pursue action against the former Directors to retrieve the sales tax dues owed by the company undergoing liquidation.