In a significant ruling delineating the personal liability of company directors under GST law, the Madras High Court has held that directors are not automatically liable for GST dues of a company undergoing liquidation, unless statutory conditions for fastening such liability are strictly satisfied.
The judgment provides critical clarity on the scope of Section 89 of the CGST Act, 2017, particularly in cases where tax authorities attempt recovery from directors merely on account of their position in the company.
Statutory Framework: Section 89 of the CGST Act
Section 89 of the CGST Act creates a limited statutory exception to the principle of corporate personality by permitting recovery of tax dues from directors of a private company only when:
- The tax dues cannot be recovered from the company, and
- Such non-recovery is attributable to gross neglect, misfeasance, or breach of duty on the part of the director
The provision thus does not impose vicarious or automatic liability, but requires a clear causal nexus between the director’s conduct and the loss of revenue.
Facts of the Case
In the present case, the GST Department initiated recovery proceedings against a former director for outstanding GST dues of the company, which had gone into liquidation under the Insolvency and Bankruptcy Code (IBC).
The department proceeded on the premise that once the company is unable to pay its dues, directors become personally liable under Section 89, without recording any specific finding of neglect or misconduct.
Aggrieved, the petitioner approached the Madras High Court challenging the recovery action.
Court’s Analysis and Findings
The Madras High Court rejected the department’s approach and made the following key observations:
- Mere directorship does not create personal liability for GST dues
- Section 89 requires the department to first exhaust recovery against the company
- The authority must record a specific finding, based on material evidence, that non-recovery is due to the director’s gross neglect, misfeasance, or breach of duty
- In the absence of such findings, recovery proceedings against directors are without jurisdiction
The Court emphasised that Section 89 cannot be invoked mechanically or as a recovery shortcut when corporate recovery becomes difficult.
Impact of Liquidation Under IBC
A critical aspect of the ruling is the Court’s recognition of the IBC framework. Once liquidation proceedings are initiated:
- Claims of the GST Department must be lodged before the liquidator
- Recovery must follow the waterfall mechanism under Section 53 of the IBC
- Parallel coercive recovery against directors defeats the collective insolvency process
The Court implicitly reaffirmed that GST authorities, like all other creditors, are bound by the insolvency regime and cannot bypass it by targeting directors personally.
Burden of Proof on the Department
The judgment underscores that the burden of proof squarely lies on the tax department to establish:
- Failure of recovery from the company
- Director’s culpable conduct contributing to such failure
Absent these elements, invocation of Section 89 is legally unsustainable.
Jurisprudential Significance
The ruling aligns with settled principles of company law and tax jurisprudence that:
- Corporate veil cannot be lifted casually
- Penal or recovery provisions must be strictly construed
- Personal liability provisions require express statutory satisfaction of conditions
It also brings GST recovery jurisprudence in harmony with earlier rulings under the Companies Act and indirect tax laws.
Practical Implications for Directors and Practitioners
For directors and advisors, the judgment provides important safeguards:
- Directors of insolvent companies are not per se guarantors of GST dues
- GST recovery notices must be scrutinised for statutory compliance under Section 89
- Insolvency professionals should resist parallel recovery actions that disrupt liquidation
For tax authorities, the ruling serves as a caution against overreach in recovery proceedings.
Conclusion
The Madras High Court’s decision reinforces that GST law does not override fundamental principles of corporate liability. Section 89 is an exception, not the rule, and can be invoked only upon strict satisfaction of statutory conditions. The judgment strengthens legal certainty for company directors while ensuring that GST recovery actions remain lawful, proportionate, and procedurally sound.
Source: TaxGuru