2019 (3) TMI 310 - HC - Customs

Liability of petitioner/ Director for dues of the company - recovery of defaults of company - Section 142(1)(c)(ii) of The Customs Act, 1962 r/w Rule 4 of The Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995 - case of petitioner is that the dues of the company cannot be recovered from the petitioner even if it is outstanding. Held that - On perusal of section 142 of CA, it is indicated that it enables recovery of sums due to Government. Now, where any sum payable by any person would mean a sum due and payable to the Government even by an artificial person such as a company in this case. It is stated in the legal provision, that where any sum payable by the person is not paid, the proper officer may deduct or may require any other officer of Customs to deduct the amount so payable from any money owing to such person which may be under the control of the officer or such other officer of Customs. Thus, the provision enables deduction of money owing and payable by the Government to such person. That, therefore, means that appropriation and adjustment is possible as against the monies owed by the Government to such person. It is only because that person has not paid the sum payable to the Government that this power is conferred. The other way or manner of recovery is that, the Assistant Commissioner of Customs or the Deputy Commissioner of Customs may recover or may require any other officer of Customs to recover the amount payable by detaining and selling any goods belonging to such person, or if the amount cannot be recovered from such person in the manner provided in Clause (a) or Clause (b) of Section 142, then, the Assistant Commissioner or the Deputy Commissioner can prepare a certificate signed by him specifying the amount due from such person and send it to the Collector of the District in which such person owns any property or resides or carries on his business and the said Collector, on receipt of such certificate, shall proceed to recover from such person the amount specified thereunder as if it were arrears of land revenue. Then there are other miscellaneous Rules but what we find is that Section 142 r/w these Rules proceeds on the footing that dues can be recovered by terming even a company as defaulter. The word person therefore includes both a natural and artificial person. The question is not only this, inasmuch as this aspect is clear by the provision itself and we have no doubt in our mind that a defaulter can be a company or any artificial person, as well - The law requires a specific provision to be enacted in that behalf. Piercing of veil - separate corporate legal entity - Held that - In the present case, according to Mr. Jetly, the piercing of veil has been done and that is why notices have been issued. We are sorry we cannot accept his contention and for more than one reason. This conclusion must be clearly discernible from the orders in the adjudication proceedings, in the sense the show cause notices must be directed to the Director personally and in addition to the corporate entity. Secondly, such corporate entity together with the Director must be heard and the Director must be granted an opportunity to satisfy the Adjudicating Authority that insofar as the company and its business is concerned, the Director may, as a part and parcel of the Board, lay down broad policies and take decisions in relation thereto but the day-to-day business is not discharged by him - Something more than this and proof of involvement not only in the day-to-day activities but all affairs will also have to be placed on record to establish the piercing of veil. The argument now built, only on the basis of this principle and referred in the affidavit in reply is thus of no avail to Mr. Jetly. On that basis, we cannot hold that the petitioner is also liable for the dues of the company. Dues of the company cannot be recovered from the petitioner personally. The demand notice to that extent is quashed and set aside. - Petition allowed.

Issues Involved:
1. Liability of a former director for the dues of a company.
2. Applicability of Section 142 of the Customs Act, 1962.
3. Interpretation of the term "defaulter" under the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995.
4. Piercing the corporate veil to hold a director personally liable.

Detailed Analysis:

1. Liability of a Former Director for the Dues of a Company:
The petitioner, a former director of a company, challenged a demand notice requiring him to pay outstanding dues of the company. The court examined whether a director could be held personally liable for the dues of the company. The petitioner argued that the company has an independent existence in law, unlike a partnership firm, and thus, the dues cannot be recovered from its director. The court referred to previous judgments, notably Sunil Parmeshwar Mittal v. Dy. C. (Recovery Cell), C.Ex., Mumbai-I, which held that a director is not liable for the company's dues unless there is a specific statutory provision imposing such liability. The court reiterated that no such provision exists under the Customs Act or the relevant rules.

2. Applicability of Section 142 of the Customs Act, 1962:
Section 142 of the Customs Act, 1962, was scrutinized to determine its applicability in recovering dues from a director. The section outlines the methods for recovering sums due to the government, including deduction from money owed to the defaulter, detention and sale of goods, and attachment of property. The court emphasized that the term "person" in this section includes both natural and artificial persons, such as companies. However, it does not explicitly make directors personally liable for the company's dues.

3. Interpretation of the Term "Defaulter" under the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995:
The court examined the definition of "defaulter" in Rule 2(vi) of the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995, which includes any person from whom government dues are recoverable. The court concluded that while a company can be termed a defaulter, there is no provision in the rules making a director personally liable for the company's dues. The court cited the Chandrakant Bhalchandra Garware v. The Union of India & Ors. decision, which held that a director is not liable for the company's dues in the absence of a specific statutory provision.

4. Piercing the Corporate Veil to Hold a Director Personally Liable:
The respondents argued that the petitioner, as the predominant shareholder and director, should be personally liable for the company's dues. They suggested piercing the corporate veil to hold the petitioner accountable. The court rejected this argument, stating that piercing the corporate veil requires clear evidence of personal involvement in the company's day-to-day activities and financial management. The court emphasized that such a conclusion must be discernible from the adjudication proceedings and that the director must be specifically targeted in the show cause notices and given an opportunity to defend themselves. The court found no such evidence in this case.

Conclusion:
The court declared that the dues of the company cannot be recovered from the petitioner personally. The demand notice was quashed to the extent it sought recovery from the petitioner. However, the authorities were allowed to pursue recovery against the company and its assets. The judgment reinforced the principle that directors are not personally liable for the company's dues unless explicitly provided by statute.

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