Madras High Court Quashes Ex Parte Tax Orders Against Director of Liquidated Company

Case Name:

W.P.No.19728 of 2020 - Smt. K. Malathi vs. State Tax Officer and A.R. Ramasubramania Raja

Key Takeaways:

1. The High Court of Madras set aside ex parte orders demanding taxes, interest, and penalties from the director of a company in liquidation.
2. The court ruled that the orders were passed in the name of the company despite the State Tax Officer being aware of the liquidation.
3. The director refrained to respond to the orders once the Official Liquidator was appointed, and the Official Liquidator’s failure to appear and file a reply during the proceedings rendered the orders unsustainable.
4. The respondents were directed to approach the Official Liquidator if necessary, and if the company does not have sufficient funds to settle the sales tax dues, a new cause of action would arise to recover the dues from the ex-directors.

Case Synopsis:

The document is a court order from the High Court of Judicature at Madras, with the case number W.P.No.19728 of 2020. The order was issued on October 30, 2023, by Justice Krishnan Ramasamy.

The petitioner in this case is Smt. K. Malathi, and the respondents are the State Tax Officer, Erode Division, and A.R. Ramasubramania Raja, the Official Liquidator. The writ petitions were filed under Article 226 of the Constitution of India, seeking a Writ of Certiorari to quash the impugned orders.

The petitioner, who was the Director of M/s. Sri Karunambigai Spinning Mills Pvt. Ltd. (SKMPL), stated that SKMPL had been ordered to be liquidated by the National Company Law Tribunal (NCLT). The State GST Officers visited the factory premises of SKMPL and conducted an inspection, during which they seized certain documents. Based on these documents, a show cause notice was issued under Section 74 (of Income Tax Act, 1961) of the CGST & SGST Act, demanding recovery of input tax credit and tax for the year 2018-19.

The petitioner claimed that she had no locus standi to represent SKMPL after the order of liquidation passed by NCLT and therefore did not file a reply to the show cause notice. The first respondent (State Tax Officer) informed the Official Liquidator about this and provided an opportunity for a hearing. However, the Official Liquidator did not file any reply or appear for the hearing, leading to the first respondent passing ex parte orders demanding taxes, interest, and penalties against SKMPL.

The petitioner expressed apprehension that the first respondent may proceed to recover the taxes and penalties from her. The petitioner argued that the impugned orders were arbitrary, illegal, and in violation of natural justice and the provisions of the Insolvency and Bankruptcy Code (IBC) and the CGST Act and SGST Act.

The court considered the arguments made by the petitioner and observed that the impugned orders were passed in the name of the company in liquidation, despite the first respondent being aware of the liquidation. The court noted that the petitioner could not respond to the orders once the Official Liquidator was appointed, and the Official Liquidator also failed to appear and file any reply during the proceedings. Therefore, the court concluded that the impugned orders were not sustainable and set them aside.

The court further stated that if the company in liquidation does not have sufficient funds to settle the sales tax dues, a new cause of action would arise to recover the dues from the ex-directors of the company. However, since the issue of fund availability with the Official Liquidator was yet to be decided, there was no cause of action at present to initiate action against the ex-directors. The court allowed the writ petitions, set aside the impugned orders, and directed the respondents to approach the Official Liquidator if necessary. The court also mentioned that if the Official Liquidator concludes that the company does not have sufficient funds, the respondents would be at liberty to proceed against the ex-directors in accordance with the law.

FAQ:

Q1: What were the writ petitions filed for?

A1: The writ petitions were filed to challenge the ex parte orders demanding taxes, interest, and penalties from the director of a company in liquidation.

Q2: Why did the court set aside the orders?

A2: The court set aside the orders because they were passed in the name of the company despite the State Tax Officer being aware of the liquidation. The director could not respond to the orders once the Official Liquidator was appointed, and the Official Liquidator’s failure to appear and file a reply during the proceedings rendered the orders unsustainable.

Q3: What happens next?

A3: The respondents were directed to approach the Official Liquidator if necessary. If the company does not have sufficient funds to settle the sales tax dues, a new cause of action would arise to recover the dues from the ex-directors.

Q4: Can the respondents proceed against the ex-directors?

A4: The court stated that if the Official Liquidator concludes that the company does not have sufficient funds, the respondents would be at liberty to proceed against the ex-directors in accordance with the law.

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 (of Income Tax Act, 1961), 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 Income Tax Act, 1961) 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.

Suk 30.10.2023

KRISHNAN RAMASAMY, J.