Revenue to Approach Liquidator First, Directors Second for Unrecovered Dues

By Editor5 Goods and Services Tax Judiciary December 10, 2023

TaxGuru Citation: 2023 taxguru.in 7511
Case Name: Smt. K. Malathi Vs State Tax Officer (Madras High Court)
Appeal Number: Only available for paid members
Date of Judgement/Order: Only available for paid members
Courts: All High Courts, Madras High Court

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Smt. K. Malathi Vs State Tax Officer (Madras High Court)

In a significant legal development, the Madras High Court recently delivered a crucial judgment in the case of Smt. K. Malathi versus the State Tax Officer, challenging the impugned orders related to the liquidation of M/s. Sri Karunambigai Spinning Mills Pvt. Ltd. (SKMPL). The court’s decision, dated 28.09.2020, has far-reaching implications for the recovery of outstanding dues from companies undergoing liquidation, particularly addressing the liability of directors in such scenarios.

Background:

The petitioner, Smt. K. Malathi, was the Director of SKMPL, which had been ordered for liquidation by the National Company Law Tribunal (NCLT) on 09.07.2019. Subsequently, State GST Officers, on 10.06.2020, visited the factory premises of SKMPL, recovering certain documents during an inspection. Based on the seized documents, a show cause notice under Section 74 of the CGST & SGST Act was issued on 15.06.2020, demanding the recovery of input tax credit and taxes for the year 2018-19.

The petitioner, having sought legal counsel, refrained from responding to the show cause notice, asserting that she lacked the standing to represent SKMPL post the NCLT’s liquidation order. The State GST Officers, having intimated the Official Liquidator about this, proceeded to pass ex-parte orders, demanding substantial taxes, interest, and penalties against SKMPL. The petitioner, fearing personal liability, approached the Madras High Court to challenge these orders.

Legal Analysis:

The crux of the petitioner’s argument lay in the alleged procedural irregularities, contending that the impugned orders were arbitrary, illegal, and in violation of natural justice and various provisions of the Insolvency and Bankruptcy Code (IBC), CGST Act, and SGST Act.

The Court observed that Section 88(3) of the CGST Act establishes the principle of vicarious liability for directors of a liquidated company. It mandates that if any tax, interest, or penalty remains unrecovered during the liquidation of a private company, its directors become jointly and severally liable for payment.

Key Findings: