Directors cannot Directly Targeted for Company’s GST Dues During Liquidation: Madras HC Grants Liberty to ‘Extricate’ Liability [Read Order]

The Madras High Court has held that directors of a company under liquidation cannot be straightaway targeted for recovery of the company’s GST ( goods and servicestax ) dues. It granted them liberty to seek “extrication” from such liability.

N. Ramkhuar Narasimhan and Poorani Nagarajan, who were directors of M/s. Infinitas Energy Solutions Pvt. Ltd., a company which had entered insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC).

The petitioners filed a petition in the high court challenging the State Tax Department's recovery action, which included the seizure of their personal bank accounts, for GST liabilities that were allegedly incurred when the business was already in liquidation.

As per the facts recorded by the Court, an Interim Resolution Professional (IRP) was appointed for the company on 08.09.2017, and later the company was ordered to be liquidated by an order dated 06.02.2019, with the same professional being appointed as the Liquidator.

Despite liquidation, it was noted that the company’s business was carried on during April 2019 to March 2021, and GST liability was stated to have arisen during this period.

However, instead of pursuing recovery through the liquidation mechanism and from the company’s assets, the Department initiated recovery proceedings by attaching the individual directors’ bank accounts, treating them as directors “as per MCA records.”

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The petitioners argued that they were no longer in control of the company and that the company was under the charge of the Liquidator, making direct recovery from them unjustified.

Justice C. Saravanan examined Section 88 of the GST Act, which deals with liability in case of a company in liquidation.

The Court stated that Section 88(3) makes directors jointly and severally liable only in a specific situation where tax, interest or penalty determined on the company cannot be recovered, and even then, the director gets an opportunity to avoid liability by proving that non-recovery was not due to any gross neglect, misfeasance or breach of duty on their part.

The Court also noted that part of the tax had already been recovered from the company’s credit ledger, and what remained was interest and penalty.

Therefore, the Court found no justification for attaching the personal bank accounts of the directors without following Section 88(3).

Accordingly, the High Court allowed the petitioners to file an application before the State Tax authorities within 15 days to “extricate” themselves from the liability.

The authorities were also directed to pass appropriate orders on merits within 15 days thereafter, after providing the petitioners an opportunity of hearing. The attachment shall be lifted subject to the final order passed by the department.

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