Director not liable to pay GST when it is not Determinable that Company is unable to Pay during Liquidation Proceedings: Madras HC [Read Order]

In a recent decision the Madras High Court has ruled that the director not liable to pay GST when it is not determinable that the company is unable to pay during liquidation proceedings.

The State GST Officers visited the factory premises of SKMPL and conducted inspection and recovered certain documents. Based on the documents seized, a show cause notice dated 15.06.2020 was issued under Section 74 of the CGST & SGST Act, containing various allegations and demand for recovery of input tax credit and demand of tax for the year 2018-19.

According to the petitioner, K. Malathi, she got legal opinion and came to know that she has no locus standi to represent SKMPL after the order of liquidation passed by NCLT and hence, she has not filed any reply to the show cause notice. Thereafter, the first respondent intimated the same to the Official Liquidator/2 nd respondent and also provided an opportunity of hearing.

However, the Official Liquidator has neither filed any reply nor appeared for hearing, which prompted the first respondent to pass impugned orders ex parte, demanding huge taxes, interest and penalties against SKMPL. Now the petitioner apprehends that the first respondent may proceed to recover thedemand of taxes and penalties, etc., confirmed on SKMPL, from the petitioner. Hence the Writ Petition.

The counsel for the petitionersubmitted that the impugned orders of demand came to be passed in the name of the company in liquidation and the first respondent was aware of the fact that the company was in liquidation. He pointed out that the petitioner cannot respond to the impugned orders once the Official Liquidator was appointed and unfortunately, the Official Liquidator also failed to appear and file any reply during adjudication of the proceedings by the first respondent and the impugned orders came to be passed ex parte. Therefore, the impugned orders are not sustainable and liable to be set aside.

Sections 88(3) of the CGST Act, incorporated the principle of vicarious liability of the Directors of the debtor company. It provides that when any private company is liquidated and any tax, interest or penaltydetermined under this Act remains un-recovered, then the Directors of such debtor company shall be jointly and severally liable for the payment of such tax, interest or penalty.

A Single Bench of Justice observed that “In case there are no funds available with the company in liquidation, in which case, it is not possible to recover the sales tax dues from the Company in liquidation, in such circumstances, a new cause of action would arise to recover the sales tax dues from the Ex.Directors of the Company in liquidation. In the present case, the issue of non-availability of the funds with the Official Liquidator for disbursement of the claims, is yet to be decided. Therefore, at present there is no cause of action arose to initiate against the Ex.Directors to recover the sales tax dues payable by the Company in liquidation.”

To Read the full text of the Order CLICK HERE

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