Liability of Directors of Private Company – Section 89 of GST

Under the GST regime, businesses are expected to comply strictly with tax laws and meet their obligations in a timely manner. While the responsibility of tax compliance primarily lies with the company, directors of private companies are not completely shielded from liability. Section 89 of the CGST Act, 2017 outlines the personal liability of directors when a private company defaults in paying tax dues. This provision is particularly crucial because it pierces the corporate veil in specific circumstances.

In this blog, we will explore the scope, applicability, and legal implications of Section 89 of the CGST Act, focusing on the liability of directors of private companies.

Understanding Section 89: Liability of Directors

Section 89 of the CGST Act deals with the liability of directors of private companies when tax, interest, or penalties due from the company cannot be recovered by the tax authorities. It applies notwithstanding anything contained in the Companies Act, 2013, meaning its provisions take precedence over the Companies Act in matters of GST recovery.

Key Provisions of Section 89(1):

• If any tax, interest, or penalty remains unpaid by a private company for any period in respect of any supply of goods or services or both,

• And if such dues cannot be recovered from the company,

• Then, every person who was a director during such period shall be jointly and severally liable for the payment of such dues.

• However, a director can avoid liability if he proves that the non-recovery was not due to his gross neglect, misfeasance, or breach of duty related to the affairs of the company.

This provision imposes a burden of proof on the director to demonstrate that the default was not due to any fault or wrongdoing on his part.

Important Terms Explained

• Joint and Several Liability: This means that the tax authorities can recover the entire unpaid amount from any one or more of the directors who were in office during the default period.

• Gross Neglect, Misfeasance, or Breach of Duty: These are serious failures in fulfilling directorial duties. A director must show he exercised reasonable care and diligence in managing the company’s affairs.

Section 89(2): Conversion from Private to Public Company

This sub-section addresses the scenario where a private company converts into a public company.

• If tax, interest, or penalty remains unpaid for the period when the company was a private company, and

• If such amounts cannot be recovered before conversion,

• Then, the directors of the company during its private status shall not be held liable under Section 89(1).

Exception:

• The above relief does not extend to any personal penalty imposed on the director.

• Thus, if a personal penalty is levied specifically on a director (for instance, for fraud or misconduct), it will still be enforceable.

Practical Implications of Section 89

1. Increased Accountability for Directors
   Directors of private companies must ensure compliance with GST provisions, as they can be personally held liable if the company defaults.

2. Due Diligence during Tenure
   Directors must actively monitor the company’s GST filings, payments, and overall tax compliance to avoid potential liability.

3. Impact on Resignation or Exit
   A director cannot escape liability simply by resigning. If the default occurred during their tenure, they remain liable unless they can prove their innocence.

4. No Protection under Companies Act
   The overriding effect of Section 89 implies that indemnity clauses or limited liability protections under the Companies Act may not protect directors in case of tax defaults.

How Directors Can Safeguard Themselves

To mitigate the risk of personal liability under Section 89, directors should:

• Maintain proper records and minutes of board meetings.

• Ensure timely payment of GST dues.

• Regularly review the company’s tax compliance reports.

• Document instances where objections were raised or concerns were expressed regarding non-compliance.

• Consider obtaining Directors and Officers (D&O) liability insurance that includes coverage for tax-related liabilities.

Judicial Precedents and Interpretations

Although there is limited case law under the GST regime concerning Section 89, similar principles have been upheld in indirect tax laws like the erstwhile Service Tax and Central Excise. Courts have generally emphasized that directors must demonstrate that they were not negligent or involved in misconduct to escape liability.

Conclusion

Section 89 of the CGST Act serves as a strong deterrent against tax evasion and negligence by placing personal liability on directors of private companies. It ensures that directors cannot hide behind the corporate structure to escape responsibility when a company defaults on its tax obligations.

For directors, the takeaway is clear: exercise due diligence, maintain transparency, and ensure the company meets all GST requirements. Failure to do so may result in personal financial exposure under the law.

Frequently Asked Questions (FAQs)

Q1. Who can be held liable under Section 89?
Any person who was a director of a private company during the period of tax default can be held jointly and severally liable, unless they prove they were not at fault.

Q2. Does this section apply to directors of public companies?
No, Section 89 specifically applies to private companies. It does not extend to directors of public companies.

Q3. Can directors escape liability after company conversion?
Yes, if the company is converted into a public company and the tax dues are not recoverable before the conversion, directors are not liable under Section 89(1). However, personal penalties still apply.

Q4. Can resignation save a director from liability?
No, resignation does not absolve a director of liability if the default occurred during their tenure. Liability under Section 89 is retrospective for the period of directorship.

If you’re a director or stakeholder in a private company, staying informed about your tax responsibilities under GST is essential. Non-compliance not only affects the company but can also have serious personal consequences.