The Madras High Court has clarified that individual directors of a company under liquidation cannot be subjected to personal tax recovery merely by virtue of their former position. The judgment reinforces the principle that personal liability under tax statutes requires proof of culpable conduct, not mere association. This ruling provides critical protection to directors who have ceased active involvement during insolvency proceedings.
Background & Facts
The Dispute
The petitioners, former directors of M/s. Infinitas Energy Solutions Pvt. Ltd., faced recovery proceedings initiated by the State Tax Department for unpaid GST liabilities incurred by the company between April 2019 and March 2021. The department attached their personal bank accounts, relying on their status as directors at the time the tax liability arose, despite the company having been under formal liquidation since February 2019.
Procedural History
- 08.09.2017: Fourth respondent appointed as Interim Resolution Professional (IRP) under the IBC, 2016
- 06.02.2019: Company ordered to be liquidated; IRP appointed as Liquidator
- 2019 - 2021: Company continued operations under Liquidator’s control, incurring GST liabilities
- 2025: Tax authorities attached petitioners’ bank accounts under Section 88(3) of the GST Act
- 21.01.2026: Writ petition filed before Madras High Court challenging the attachment
Relief Sought
The petitioners sought quashing of the attachment orders and a declaration that they are not personally liable for the company’s tax arrears, as they had no role in management after the appointment of the Liquidator.
The Legal Issue
The central question was whether Section 88(3) of the GST Act imposes automatic personal liability on former directors for unrecovered tax dues during liquidation, or whether the burden lies on the tax authority to prove gross neglect, misfeasance, or breach of duty by the director.
Arguments Presented
For the Petitioner
The petitioners relied on the plain language of Section 88(3), arguing that liability is not automatic. They contended that the provision requires the Commissioner to be satisfied that non-recovery was attributable to gross neglect, misfeasance, or breach of duty by the director. They emphasized that they had no control over the company after the Liquidator’s appointment and that the company’s continued operations were under statutory supervision. They cited State of Tamil Nadu v. M/s. Sree Sankara Enterprises to support the proposition that director liability under tax statutes must be proven, not presumed.
For the Respondent
The State contended that the directors remained liable under Section 88(3) as they were directors during the period in which the tax liability accrued. They argued that the statutory language does not require proof of personal wrongdoing, and that the attachment was a legitimate recovery mechanism to ensure compliance. They relied on the principle that directors are custodians of corporate affairs and must be held accountable for fiscal mismanagement.
The Court's Analysis
The Court undertook a detailed textual and purposive interpretation of Section 88(3). It observed that the provision does not create absolute liability but conditions it on the failure to recover dues from the company and the director’s failure to prove absence of culpable conduct. The Court emphasized that the phrase "unless he proves to the satisfaction of the Commissioner that such non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty" places the burden of proof on the director, but only after the tax authority establishes a prima facie case of non-recovery.
"The legislature did not intend to make every director a guarantor of corporate tax obligations. The statutory scheme contemplates a balancing of corporate insulation with accountability for culpable conduct."
The Court noted that the company was under the exclusive control of the Liquidator from February 2019, and the petitioners had no managerial authority or access to financial records during the relevant period. The attachment of personal bank accounts without any inquiry into the directors’ conduct violated the principle of natural justice. The Court further held that recovery from the company’s credit ledger demonstrated that the tax department had not exhausted all avenues of recovery from the corporate entity itself.
The Verdict
The petitioners succeeded. The Court held that Section 88(3) GST Act does not impose automatic liability on directors; personal liability arises only if the Commissioner is satisfied that non-recovery resulted from gross neglect, misfeasance, or breach of duty. The attachment of bank accounts was vacated, and the tax authorities were directed to adjudicate the matter afresh with a hearing.
What This Means For Similar Cases
Director Liability Requires Culpable Conduct
- Practitioners must now challenge automatic attachments under Section 88(3) by demonstrating the director’s lack of control during liquidation
- Tax authorities must record specific findings on gross neglect before initiating recovery against directors
- Mere directorship during the tax period is insufficient to establish liability
Liquidator’s Role Supersedes Former Directors
- Once a Liquidator is appointed under IBC, former directors lose managerial authority
- Any tax liability incurred post-appointment must be pursued against the Liquidator’s estate or corporate assets, not personal accounts
- Directors should immediately file affidavits of cessation of duties upon Liquidator’s appointment
Procedural Fairness Is Mandatory
- Tax authorities cannot proceed ex parte against directors
- A hearing must be granted before any final order of personal liability is passed
- Attachment of bank accounts without adjudication violates Article 14 and Article 21 of the Constitution
