Madras High Court: Directors Cannot Be Directly Targeted for GST Dues During Liquidation
Court Grants Liberty to Directors to Extricate Liability
GST Responsibility Lies Primarily with the Company Under Insolvency
By Our Legal Correspondent
New Delhi: January 24, 2026:
In a significant ruling that strengthens corporate governance and provides clarity on tax liability during insolvency, the Madras High Court has held that directors of a company under liquidation cannot be directly targeted for recovery of Goods and Services Tax (GST) dues. The Court emphasized that liability can only be imposed if it is conclusively determined that the company is unable to pay its dues.
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This judgment comes in response to petitions filed by directors of companies undergoing liquidation under the Insolvency and Bankruptcy Code (IBC), 2016, and has far-reaching implications for corporate law, taxation, and insolvency proceedings in India.
Background of the Case
The case involved directors of Infinitas Energy Solutions Pvt. Ltd., which had entered insolvency proceedings. Tax authorities attempted to recover GST dues directly from the directors, bypassing the company’s liquidation process. The directors challenged this move, arguing that they should not be held personally liable unless the company’s inability to pay was legally established.
The Court agreed, granting liberty to the directors to file applications before the State Tax authorities within 15 days to “extricate” themselves from liability.
Court’s Observations
The Madras High Court clarified several important points:
- Primary Liability Lies with the Company: GST dues are the responsibility of the company, not its directors.
- Section 88(3) of the CGST Act: Directors can be held jointly and severally liable only when it is conclusively determined that the company cannot pay the tax, interest, or penalty.
- No Automatic Liability: Directors cannot be automatically targeted during liquidation proceedings.
- Due Process Required: Tax authorities must follow proper legal procedures before imposing liability on directors.
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This ruling aligns with earlier judgments where courts held that directors are not responsible for tax dues unless the company’s inability to pay is proven.
Implications of the Ruling
The judgment has several implications:
- Relief for Directors: Protects directors from arbitrary recovery actions during insolvency.
- Corporate Governance: Reinforces the principle that companies are separate legal entities.
- Tax Administration: Ensures that authorities follow due process before targeting individuals.
- Insolvency Proceedings: Clarifies the role of directors once a company enters liquidation under the IBC.
Expert Reactions
Legal experts and tax professionals have welcomed the ruling:
- Corporate Lawyers: Say the judgment strengthens the doctrine of separate legal personality.
- Tax Consultants: Believe it will reduce harassment of directors during insolvency.
- Policy Analysts: Argue that the ruling will improve investor confidence by ensuring fair treatment of company directors.
Broader Significance
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This case highlights the intersection of corporate law, taxation, and insolvency. It underscores the importance of protecting directors from undue liability while ensuring that companies fulfil their tax obligations.
The ruling also sends a message to tax authorities to respect the insolvency framework and avoid bypassing due process.
Conclusion
The Madras High Court’s ruling that directors cannot be directly targeted for GST dues during liquidation is a landmark in corporate and tax jurisprudence. It provides relief to directors, clarifies the scope of liability under the CGST Act, and reinforces the principle of corporate autonomy.
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