PERSONAL RESPONSIBILITY OF DIRECTORS UNDER VAT / GST

INTRODUCTION

As per normal
understanding, the directors are not liable for any dues of the company.
Limited companies are basically formed to limit the financial liabilities to
the extent of the assets of the company. However, in spite of such a legal
position, an attempt is made by the authorities to cast liability on the
directors. Normally, directors of a public limited company are not covered for
personal recovery even by any specific provision. However, there may be
specific provisions for casting liability on the directors of a private limited
company. For example, under the Maharashtra Value Added Tax Act, 2002, section
44(6) provides for personal liability of directors of a private limited
company. The said section is reproduced below for ready reference:

‘(6) Subject
to the provisions of the Companies Act, 2013 (18 of 2013), where any tax or
other amount is recoverable under this Act from a private company, whether
existing or wound up or under liquidation, for any period, (but) cannot be
recoverable, for any reason whatsoever, then, every person who was a director
of the private company during such period shall be jointly and severally liable
for the payment of such tax or other amount unless he proves that the
non-recovery cannot be attributed to any gross neglect, misfeasance or breach
of duty on his part in relation to affairs of the said company.’

It can be seen
that the liability of the directors is not blanket but subject to conditions.
In other words, if the director proves that there was no gross negligence,
misfeasance or breach of any duty, then no liability can be attracted. However,
there is also a possibility that the Revenue may try to initiate recovery from
a director in spite of there being no such negligence, etc. on the part of the
director.

DECIDED CASES

There are a
number of judgements wherein the Hon’ble Courts have held that the corporate
veil cannot be lifted for recovery of tax dues unless there are specific
provisions. Reference can be made to the judgement of the Uttarakhand High
Court in the case of Jagteshwar Prasad Bansal & others vs. State of
Uttarakhand & others (59 GSTR 491) (Uttarakhand). In
this case, the sales tax department tried to recover dues from the directors of
the company, although in the relevant Uttarakhand Value Added Tax Act there was
no specific provision for recovery from a director. However, the department
wanted to lift the corporate veil. The High Court rejected the action of the
sales tax authorities. It held that unless there is any fraud or he / she is
guilty of misrepresentation, the corporate veil cannot be lifted. In the above
judgement, the Court has referred to an earlier judgement in the case of Meekin
Transmission Ltd. vs. State of Uttar Pradesh (58 VST 201) (All.) and
reproduced the following observations of the Allahabad High Court:

‘The legal
position as discerned from the above is that in a case where the corporate
personality has been obtained by certain individuals as a cloak or a mask to
prevent tax liability or to divert the public funds or to defraud public at
large or for some illegal purposes, etc., to find out as to who are those
beneficiaries who have proceeded to prevent such liability or to achieve an
impermissible objective by taking recourse to corporate personality, the veil
of the corporate personality shall be lifted so that those persons who are so
identified are made responsible. However, this doctrine is not to be applied as
a matter of course, in a routine manner and as a day-to-day affair so as to
recover the dues of a company, whenever and for whatever reason they are
unrecoverable, from the personal assets of the directors. If such a course is
permitted, it would lead to not only disastrous results but would also destroy
completely the concept of juristic personality conferred by various statutes
like the Act in the present case and would make several enactments and their
effect to be redundant and illusory.

Moreover, the
shallowness of arguments in favour of making directors personally responsible
can be considered from another angle. In every case the director may not be a
shareholder of the company. He may have been appointed as director for taking
advantage of his expertise in his field of vocation or profession, and for
achieving goals for which the company is incorporated. Such director is paid
remuneration, if any, for the services he rendered. Otherwise he is not at all
a beneficiary of the business or trade, etc., as the case may be, in which the
company is engaged. Such benefit would be available only to the shareholders as
they would only be entitled to share the profits earned by the company in the
form of dividends as decided by the Board of Directors. In such case such
director, though an agent of the company, he is more in the nature of an
officer of the company and not in the capacity of limited ownership by way of
shareholding. Such a director, in our view, unless guilty of misfeasance, fraud
or acting ultra vires, we are not able to understand
as to how he can be made responsible personally for the dues of the company even
if we apply the doctrine of piercing the veil.

If in such a
case the veil is to be lifted, the persons behind the veil, at the best, would
be the promoters of the company or those who have sought to obtain corporate
personality as a sham or bogus transaction. Similarly, in some of the companies
the financial institutions, who advance funds as loan, etc., nominate their
director/s to keep some kind of monitoring over the functions of the company so
that it may not go in liquidation on account of negligent and careless function
of the Board of Directors. Such directors also, in our view, cannot be included
in the category of the persons who would be responsible personally for the dues
of
the company.

In order to
find out as to who are the persons responsible personally when the veil is
lifted it would be wholly irrelevant as to whether such person is a director or
a promoter shareholder or otherwise of the company since the purpose of lifting
the veil is to find out the person/s who is operating behind the corporate
personality for his personal gain. Such person may be an individual or group of
persons belonging to a family or relatives or otherwise a small group collected
with a common objective of achieving some illegal, immoral or improper purpose,
etc. So long as no investigation is made into various aspects, we are not able
to understand as to how and in what manner a director of a company can
straightway be proceeded (against) personally for recovering dues of a company
unless it is so provided by some provision of the statute.’

The
observations clearly show that unless there is fraud or deliberate misrepresentation,
the corporate veil cannot be lifted to make the directors personally liable.

In the above
judgement, there was no specific provision about recovery from the director of
a Pvt. Ltd. Co. However, even where there is specific provision about recovery
from a director of a Pvt. Ltd. Co., like section 44(6) of the MVAT Act
reproduced above, still recovery is subject to proving negligence, etc. In
other words, the said provision is also in the nature of lifting the corporate
veil. The observations made above will equally apply in case of a specific
provision also.

In view of the
above legal position it can be inferred that whether there is specific
provision or not about recovery from directors, the recovery is subject to
positive involvement for dues by the director, like fraud, etc.

POSITION UNDER GST

Though the
above position is decided in light of the provisions under the VAT regime, the
ratio will equally apply under GST, too. Under GST, there is specific provision
for recovery from directors like section 89 that provides for liability of a
director. The section reads as under:

‘89. (1) Notwithstanding anything contained in the Companies Act,
2013, where any tax, interest or penalty due from a private company in respect
of any supply of goods or services or both for any period cannot be recovered,
then, every person who was a director of the private company during such period
shall, jointly and severally, be liable for the payment of such tax, interest
or penalty unless he proves that the non-recovery cannot be attributed to any
gross neglect, misfeasance or breach of duty on his part in relation to the
affairs of the company.’

Thus, the
provision is similar to section 44(6) of the MVAT Act. The issue of negligence,
etc. is also applicable under GST. The guidelines and observations mentioned in
earlier judgements will be useful for deciding cases under GST also.

CONCLUSION