2008 (2) TMI 406 - HC - VAT and Sales Tax

Director s Liability Recovery of Dues There is provision in the law in question to recover amount from directors or shareholders personally - That being so, if revenue still proceed against the property of directors that would amount to depriving the director of his property without any authority of law and it would be a direct infringement of the constitutional right conferred upon the director vide Article 300-A of the Constitution - Whenever the State proceed to infringe constitutional protection of any person, this Court being the constitutional protector is bound to protect such person from such infringement, is bound to act upon and come to rescue to such person, and, against such unconstitutional act of the State. - Held that no recovery can be made against the director.

Issues:

1. Validity of recovery proceedings against the petitioner company (petitioner no.1).
2. Liability of the director (petitioner no. 2) for the company's outstanding tax dues.
3. Application of the doctrine of "piercing the corporate veil."
4. Applicability of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985.

Detailed Analysis:

1. Validity of Recovery Proceedings Against the Petitioner Company:

The court examined whether the recovery proceedings against the petitioner company, a registered entity under the Indian Companies Act, 1956, were valid. The company had defaulted on paying trade tax for the period 1993-94 to 1997-98, amounting to Rs. 42.88 lacs, despite being granted the facility to pay in installments. The court noted that the company had failed to comply with the rescheduled payment plan and that the Board for Industrial and Financial Reconstruction (BIFR) had concluded on 14.03.2003 that rehabilitation was not possible, recommending winding up of the company. The court held that since no winding-up proceedings were pending before the High Court, there was no legal hurdle preventing the recovery of the outstanding tax dues from the company. Consequently, the writ petition concerning the company was dismissed.

2. Liability of the Director for the Company's Outstanding Tax Dues:

The court addressed whether the director (petitioner no. 2) could be held personally liable for the company's trade tax dues. The petitioner's counsel argued that the director's liability is limited to his shareholding and that personal assets cannot be used to recover the company's debts. The court examined the legal status of a company, its directors, and shareholders, emphasizing the principle of separate legal entity established in Salomon v. Salomon & Co. The court concluded that the liability of the company does not extend to its directors or shareholders unless explicitly provided by statute or warranted by law. The court found no statutory provision under the U.P. Trade Tax Act, 1948, that made the director personally liable for the company's tax dues. Therefore, the notice issued to the director was quashed.

3. Application of the Doctrine of "Piercing the Corporate Veil":

The court discussed the doctrine of "piercing the corporate veil," which allows courts to look beyond the company's separate legal personality in cases of fraud, tax evasion, or improper conduct. The court reviewed various precedents where this doctrine was applied, including cases involving fraud, tax evasion, and avoidance of statutory obligations. However, the court emphasized that this doctrine should not be applied routinely and requires a detailed investigation into the company's affairs. In the present case, the court found no evidence of fraud or improper conduct by the director that would justify piercing the corporate veil. The court noted that the mere failure to pay tax dues does not automatically invoke this doctrine.

4. Applicability of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985:

The petitioner argued that recovery proceedings could not be initiated during the pendency of proceedings before the BIFR under Section 22 of the 1985 Act. The court noted that the BIFR had already concluded that rehabilitation was not possible and recommended winding up of the company on 14.03.2003. Since no winding-up proceedings were pending before the High Court, Section 22 did not apply, and there was no legal obstacle to the recovery of tax dues from the company.

Conclusion:

The court quashed the notice issued to the director (petitioner no. 2) for personal liability but upheld the validity of recovery proceedings against the company (petitioner no. 1). The court emphasized that the doctrine of piercing the corporate veil should be applied cautiously and not as a routine measure. The petition was partly allowed, and the recovery proceedings against the company could continue in accordance with the law.

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