GST Jamku AILiability of directors of private company
Section 89(1)
Notwithstanding anything contained in the Companies Act, 2013 (18 of 2013), where any tax, interest or penalty due from a private company in respect of any supply of goods or services or both for any period cannot be recovered, then, every person who was a director of the private company during such period shall, jointly and severally, be liable for the payment of such tax, interest or penalty unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
In simple terms, Section 89(1) of the Companies Act, 2013 addresses the liability of directors in private companies when it comes to unpaid taxes, interest, or penalties related to the supply of goods or services.
What the Law States According to this section, if a private company fails to pay taxes, interest, or penalties for a specific period, the directors who were in office during that time are collectively and individually responsible for settling these dues. This means that each director may be held accountable for the payment of taxes, interest, or penalties unless they can prove that the non-payment is not a result of their gross neglect, misfeasance, or breach of duty concerning the company's affairs.
Director's Liability The law emphasizes that the directors bear the responsibility for the company's financial obligations, especially in cases where the company is unable to clear its dues. However, if a director can demonstrate that their actions were not responsible for the non-payment, they may be exempt from this collective liability.
In essence, this section aims to ensure that directors are diligent in overseeing the financial matters of the private company they serve. It holds them accountable for any failure to meet tax obligations, interest payments, or penalties unless they can prove that their actions were not a direct cause of the company's inability to settle these dues.
Section 89(2)
Where a private company is converted into a public company and the tax, interest or penalty in respect of any supply of goods or services or both for any period during which such company was a private company cannot be recovered before such conversion, then, nothing contained in sub-section (1) shall apply to any person who was a director of such private company in relation to any tax, interest or penalty in respect of such supply of goods or services or both of such private company:
Provided that nothing contained in this sub-section shall apply to any personal penalty imposed on such director.
In the business world, the liability of directors in private companies is an important aspect, especially when such companies undergo a conversion process. Section 89(2) addresses a specific scenario involving the conversion of a private company into a public one.
Conversion Dynamics When a private company transforms into a public company, complications may arise regarding the recovery of taxes, interest, or penalties associated with the supply of goods or services during its private company phase.
Exception to Sub-section (1) In this context, Section 89(2) comes into play. This section outlines that the provisions of sub-section (1) do not apply to individuals who served as directors during the private company phase. In simpler terms, directors are not automatically held responsible for any outstanding taxes, interest, or penalties related to the supply of goods or services during the private company period after the conversion.
Personal Penalties Exclusion It's important to note that while Section 89(2) provides a safeguard for directors in most cases, it does not extend to personal penalties imposed on directors. Directors remain accountable for any personal penalties levied on them, even in the context of the company's conversion.
Understanding these provisions is crucial for directors and stakeholders involved in the conversion process, ensuring clarity on the extent of liability and responsibilities during this transition.