Case Law Details

Case Name : Smt. K. Malathi  Vs State Tax Officer (Madras High Court)
Appeal Number : W.P.No.19728 of 2020
Date of Judgement/Order : 30/10/2023
Related Assessment Year :

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:

  • Locus Standi Post Liquidation: The Court acknowledged that the petitioner had no standing to respond to the impugned orders after the appointment of the Official Liquidator. It emphasized that the Official Liquidator’s failure to participate in the proceedings contributed to the ex-parte nature of the orders.
  • Proper Course of Action: The Court highlighted that the appropriate course of action for revenue authorities is to file claims before the Official Liquidator. Only if no funds are available with the company in liquidation can they proceed against the ex-directors under Section 88(3) of the CGST Act.
  • Absence of Cause of Action: The Court ruled that, at present, there is no cause of action against the ex-directors since the issue of fund availability with the Official Liquidator is yet to be decided.

Judicial Decision:

In conclusion, the Madras High Court allowed the writ petitions, setting aside the impugned orders dated 28.09.2020. The court granted liberty to the revenue authorities to approach the Official Liquidator. If the Official Liquidator determines the lack of sufficient funds to settle the sales tax dues, a new cause of action would arise to proceed against the ex-directors under Section 88(3) of the CGST Act. The judgment emphasized that the actions taken against SKMPL, currently in liquidation, were not sustainable.

No costs were awarded, and the connected Writ Petitions were closed.

This landmark judgment establishes a precedent regarding the proper legal course to be followed in cases of liquidation and recovery of dues, ensuring fair and just proceedings in accordance with the law.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

These Writ Petitions have been filed, challenging the impugned orders Nos.33AADCS1886JIZ5/2018-19, dated 28.09.2020 and 33AADCS1886JIZ5/2017-18, dated 28.09.2020 along with summary of Order of even date in Form DRC-07, passed by the first respondent and quash the same as the same being arbitrary, illegal, in violation of principal natural justice and ultra vires the provisions of Section 14, 33(5) and 238 of the IBC and Section 88 of the CGST Act and SGST Act.

2. According to the petitioner, she was the Director of M/s. Sri Karunambigai Spinning Mills Pvt. Ltd., (SKMPL) which has been ordered to be liquidated by the National Company Law Tribunal (NCLT), vide its order dated 09.07.2019 and one Sri A.R.Ramasubramanian Raja, 2nd respondent herein was appointed as the Official Liquidator. On 10.06.2020, 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, 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/2nd 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 the demand of taxes and penalties, etc., confirmed on SKMPL, from the petitioner. Hence the Writ Petition.

3. The learned counsel for the petitioner, while reiterating the averments made in the affidavit filed in support of the writ petition, would submit 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.

4. 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 penalty determined 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.

5. In the present case, the impugned orders of demand were passed based on the alleged irregularities that had taken place prior to the period of commencement of Corporate Insolvency Resolution process against M/s. SKMPL and served on the petitioner.

6. The right course available for the respondents is to file appropriate claim before the Official Liquidator. 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.

7. Therefore, the present action taken by the respondents in passing the impugned orders of demand in the name of M/s. SKMPL, which is in liquidation and serving on the petitioner, is not sustainable.

8. Accordingly, the Writ Petitions are allowed. The impugned orders, dated 28.09.2020 are set aside. The respondents are at liberty to approach the Official Liquidator and in case, the Official Liquidator comes to the conclusion that the company in liquidation has no sufficient funds to settle the sales tax dues payable by the company in liquidation, a new cause of action would arise to invoke Section 88(3) of the CGST Act and in which event, the respondents are at liberty to proceed against the Ex. Directors of the Company in liquidation in accordance with law. No costs. Consequently, connected WMPs are closed.

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