Directors Not Responsible for Tax Recovery After Liquidation: Madras High Court

The Madras High Court has ruled that directors of a company under liquidation are not liable for tax recovery if the non-recovery was not due to their negligence

The company, Infinitas Energy Solutions Pvt. Ltd., and its director (petitioner) were under liquidation, and the company had entered insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016. Therefore, an Interim Resolution Professional (IRP) was appointed for the company. Later, the company was ordered to be liquidated, and the same professional was appointed as its liquidator.

The tax authorities initiated recovery proceedings by attaching the personal bank accounts of the directors, claiming that they were liable under Section 88(3) of the GST enactments. This was challenged by the directors in the Madras High Court.

The petitioners argued that they were no longer responsible for the company’s affairs, as the liquidator was in charge.

The High Court observed that the tax had already been recovered from the company’s credit ledger and said that there was no justification for attaching the directors’ personal bank accounts.

Section 88 of the GST Act makes directors liable for the company’s unpaid taxes, interest or penalties if the dues cannot be recovered from the company, unless they prove to the commissioner that non-recovery was not due to their negligence or misfeasance.

The Court allowed the petitioners to file an application with the tax authorities to remove themselves from the recovery order within 15 days. The authorities were directed to pass orders within 15 days, giving the petitioners an opportunity to be heard.

The court lifted the attachments, subject to the order to be passed.