Recovery from Director's Personal Account for Company Dues Invalid Without Prior Adjudication of Liability

Recovery from Director’s Personal Account for Company Dues Invalid Without Prior Adjudication of Liability

Issue

Whether the GST department can directly attach the personal bank account of a former Director under Section 79 (recovery from third parties/garnishee) to recover the unpaid tax dues of a Private Limited Company, without first conducting a separate adjudication under Section 89 to establish that the non-recovery is due to the director’s gross neglect, misfeasance, or breach of duty.

Facts

The Company: EWIE Services India Pvt. Ltd.
The Assessment: An assessment order was passed against the company on 26.04.2024 for the period 2018-2019, raising a tax demand. The company challenged this order in a separate writ petition.
The Petitioner: A former Director of the company who stated that he had resigned in 2023.
The Action: To recover the company’s arrears, the department issued a notice in Form GST DRC-13 to the petitioner’s bank, attaching his personal bank account under Section 79(1)(c) of the CGST Act.
The Challenge: The petitioner challenged this attachment, arguing that he cannot be automatically held personally liable for the company’s dues without a specific finding of guilt or negligence.

Decision

The Madras High Court ruled in favour of the assessee (the Director).
No Automatic Liability: The Court held that a director’s liability for a private company’s GST dues is not automatic. Under Section 89 of the CGST Act, a director is liable only if the department proves that the non-recovery from the company is attributed to the director’s gross neglect, misfeasance, or breach of duty.
Requirement of Adjudication: Since Section 89 involves a subjective satisfaction regarding “neglect” or “misfeasance,” it requires a separate adjudication process. The department cannot straightaway jump to recovery (Section 79) without first passing an order fixing the director’s personal liability.
Conversion of Notice: To expedite the process while ensuring natural justice, the Court directed that the impugned DRC-13 (attachment notice) be treated as a Show Cause Notice (SCN) to the director.
Directions:
- The petitioner was granted 30 days to file a detailed representation/reply to this “deemed SCN.”
- The competent officer was directed to adjudicate the matter and pass a speaking order determining the director’s liability within two months after affording a personal hearing.
- Attachment Lifted: Pending this fresh adjudication, the attachment on the petitioner’s bank account was ordered to be lifted, subject to the condition that he makes no unusual transfers to deplete the funds.

Key Takeaways

Section 89 is Conditional: Unlike a sole proprietorship where liability is absolute, a Director’s liability for Pvt Ltd company dues is conditional. The “Corporate Veil” is pierced only upon proof of negligence or fraud.
Section 79 vs. Section 89: Section 79 (Recovery) is the execution step. Section 89 (Liability determination) is the adjudication step. You cannot execute before you adjudicate.
Right to be Heard: A director has a specific right to prove that the non-payment was not their fault (e.g., due to lack of control, market conditions, etc.). Denying this opportunity violates natural justice.
Relief for Ex-Directors: Directors who have resigned are particularly protected against automatic recovery for periods post-resignation or for past dues where they were not “officers in default.”

HIGH COURT OF MADRAS

Subir Ghosh

Deputy Commissioner (ST) (FAC)^*

C. Saravanan, J.

W.P. No. 34643 of 2025
W.M.P. Nos. 38840 and 38841 of 2025

SEPTEMBER 17, 2025

P.V. Sudakar for the Petitioner. V. Prashanth Kiran, Govt. Adv. for the Respondent.

ORDER

1.Heard Mr.P.V.Sudakar, the learned counsel for the petitioner and Mr.V.Prashanth Kiran, who takes notice at the admission stage and made submissions on behalf of the Respondents 1 and 2.

2. By consent, this Writ Petition is taken up for final disposal at the stage of admission.

3. The Petitioner has challenged the impugned bank attachment notice dated 29.07.2024 issued under Section 79(1)(c) r/w Section 89(1) of the respective GST Enactments, in respect of recovery measures of arrears of tax of the Company, namely, M/s.EWIE Services India Pvt. Ltd., of which the Petitioner was the Director.

4. It appears that the said Company, namely, M/s.EWIE Services India Pvt. Ltd., was an auxiliary company incorporated for supplying goods to M/s.Ford India Private Limited, which ceased to carry on business in India since the year 2019.

5. It appears that in respect of arrears of tax of the auxiliary company namely M/s.EWIE Services India Pvt. Ltd., for the tax period 2018-2019, in which the Petitioner was the Executive Director in his capacity as the Head of Development, an Assessment Order dated 26.04.2024 was passed.

6. It is the case of the Petitioner that the Petitioner resigned from the aforesaid Company formally, in the year 2023. It is the case of the Petitioner that the Petitioner is entitled for immunity from Section 89(1) of the respective GST Enactments and to this effect, the Petitioner has also sent a Representation dated 17.08.2024 which has been also acknowledged by the Office of the Respondent.

7. Learned counsel for the Petitioner further submits that the said Company namely, M/s.EWIE Services India Pvt. Ltd., of which the Petitioner was a Director has independently challenged the Assessment Order dated 26.04.2024 in W.P. No. 6238 of 2025 and the same is pending before this Court.

8. Learned counsel for the Respondents on the other hand would submit that the Writ Petition is devoid of merits and is liable to be dismissed and that the Petitioner is bound to discharge the liability in his capacity as the Director of the aforesaid company, as the said company is incorporated within the meaning of Section 79 r/w 89 of the respective GST Enactments.

9. Have considered the submissions made by the learned counsel for the Petitioner and the learned Government Advocate for the Respondents 1 and 2.

10. The Petitioner has only challenged the impugned bank attachment notice dated 29.07.2024 issued in Form GST DRC-13 under Rule 145(1) r/w 79(1) (c) of the respective GST Enactments. It would require an adjudication as to whether the Petitioner can be made liable to pay for the arrears of tax of the aforesaid Company in terms of Section 89 of the respective GST Enactments.

11. The Petitioner has incidentally also given a Representation on 17.08.2024, after the assessment order came to be passed on 26.04.2024 with request for unlien the bank account of the Petitioner at ICICI Bank, Kalyan Nagar, Bangalore.

12. Considering the same, I am inclined to dispose this Writ Petition by directing the Respondents to pass a final order by treating the impugned notice as a notice to show cause as to why penalty, tax and interest should not be recovered from the Petitioner. The Petitioner may give a detailed representation within a period of 30 days from the date of receipt of copy of this order and thereafter, the 1^st Respondent or any other officer authorised may adjudicate the same and pass appropriate orders on merits and in accordance with law within a period of two months thereafter.

13. Needless to say, the Petitioner shall be heard before final orders are passed. Pending such exercise, the attachment on the aforesaid Bank Account of the Petitioner which has been attached vide impugned notice shall be lifted. However, it is made clear that the Petitioner shall not make any unusual transfer from the account to defeat the proposed exercise.

14. Accordingly, this Writ Petition is disposed of with the above direction. Consequently, the connected miscellaneous petitions are closed. There shall be no order as to costs.