When the Corporate Door Closes, Section 88(3) Opens Another Route
The Madras High Court’s ruling in CBIGS Apparels and Jewels v. Joint Commissioner, Nungambakkam Assessment Circle, GST, Chennai and Others, along with connected writ petitions filed by Mrs. N. Seetha and Yantur Manufacturing Private Limited, 2026-VIL-720-MAD, dated 07.07.2026, addresses a serious GST recovery issue. The case concerns the recovery of tax dues owed by a private company that had gone into liquidation, and whether such recovery could extend to a person who had been a director during the period of default.
M/s CBIGS Advertising Private Limited had GST arrears of Rs.3,66,42,318/- for the tax period 2017-18. The company had filed GSTR-1 but not GSTR-3 B. Therefore, outward supplies were disclosed, but the corresponding tax liability was not discharged through the return mechanism. The company later opted for a voluntary winding-up before the National Company Law Tribunal, Chennai. A provisional liquidator was appointed on 20.03.2024 and later appointed as liquidator by order dated 29.10.2025.
The Department initiated recovery under Section 79(1)(c) of the CGST/TNGST Acts read with Rule 145(1). Communications in Form GST DRC-13 were issued to banks for attaching the accounts of Mrs. N. Seetha, CBIGS Apparels and Jewels, and Yantur Manufacturing Private Limited. The Department’s case was that Mrs. N. Seetha was a director of the defaulting company during the relevant tax period and was also connected with the other entities against whom recovery action was taken.
Director Liability Does Not Vanish With Liquidation
The key statutory provision is Section 88(3) of the CGST Act, 2017. This provision applies when a private company is wound up, and the tax, interest or penalty determined under the Act cannot be recovered from the company. In such a case, every person who was a director of the company at any time during the period for which the tax was due becomes jointly and severally liable for payment.
However, Section 88(3) does not make director liability automatic in every factual situation. It provides a statutory defence. A director can prove to the satisfaction of the Commissioner that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his or her part in relation to the affairs of the company.
This is the balance built into the provision. The Department is not left helpless merely because the company has entered liquidation. At the same time, a director is not denied an opportunity to show absence of fault. The liability arises by statute, but the defence must be established before the Commissioner.
The Relevant Period Is the Default Period
The Court emphasised that Mrs N. Seetha was a director of CBIGS Advertising Private Limited during the 2017-18 tax period, when GST dues had arisen. Her subsequent resignation did not erase the fact that she was a director during the period of default.
This distinction is important. Under Section 88(3), the relevant question is not merely whether the person remains a director on the date of the recovery notice. The relevant question is whether the person was a director during the period for which tax was due. If the answer is yes, statutory liability may arise, subject to the director’s right to prove the defence under Section 88(3).
A later resignation may be relevant for future liabilities. It may also be relevant where the tax default arose after resignation. But where the tax period itself falls during the person’s directorship, resignation after that period cannot, by itself, defeat recovery.
The Defence Must Be Proved Before the Commissioner
The Court did not finally decide whether Mrs. N. Seetha was personally at fault for the default. Instead, it clarified the correct forum and statutory route. The burden of proving that non-recovery from the company was not due to her gross neglect, misfeasance or breach of duty had to be discharged before the Commissioner.
This is a significant procedural point. The defence under Section 88(3) is a factual defence. It may require examining the director’s role, bank authority, control over tax compliance, board responsibilities, internal records, resignation documents and actual involvement in company affairs. Such questions are not normally decided at the threshold in a writ petition.
Therefore, the High Court refused to interfere with the recovery notices and left the concerned person to seek a remedy within the statutory framework. The ruling makes it clear that writ jurisdiction is not a substitute for the fact-finding enquiry contemplated by Section 88(3).
Section 79 Supplies the Recovery Machinery
Section 88(3) identifies the persons who may become liable. Section 79 provides the machinery for recovery. In the present case, the Department proceeded under Section 79(1)(c) read with Rule 145(1) of the CGST Rules, 2017. This route permits recovery by issuing directions to third persons, including banks, where money is due or may become due to the defaulter, or where money is held for or on account of the defaulter.
The petitioners challenged the bank attachments, arguing that the entities against which proceedings were brought were separate from the defaulting company. CBIGS Apparels and Jewels was a partnership firm, and Yantur Manufacturing Private Limited was another company. Mrs. N. Seetha also raised defences based on resignation and lack of current connection.
The Court did not accept these grounds as sufficient to interfere at the writ stage. The recovery action was connected with the statutory liability of a director under Section 88(3) and the factual links between the defaulting company, the director and the related entities.
Separate Legal Identity Is Strong, but Not Absolute
The petitioners argued that CBIGS Advertising Private Limited, CBIGS Apparels and Jewels, and Yantur Manufacturing Private Limited were separate legal persons. As a general proposition, that argument is legally sound. A company is distinct from its directors and shareholders. A partnership firm has a separate business and tax identity. A connected entity cannot be made liable for another entity’s dues merely because of family links.
However, separate legal identity is not an absolute answer when statutory recovery provisions and suspicious-entity structuring are involved. The Court noted that Mrs. N. Seetha had been a director of the defaulting company during the default period and had links with the partnership firm. It also noted family connections and shifting roles across entities.
This does not mean that every connected entity automatically becomes liable. It means that, on the facts before the Court, the petitioners could not use separate legal identity as a complete shield at the writ stage. The statutory enquiry and recovery framework had to be allowed to operate.
Corporate Veil Scrutiny Becomes Relevant Where Structure Looks Artificial
The judgment also briefly addresses the concept of lifting the corporate veil. The Court noted prima facie indications that companies and partnerships had been incorporated or arranged with shifting roles among family members. It also observed that there was scope to lift the corporate veil, particularly in relation to Yantur Manufacturing Private Limited.
Lifting the corporate veil means looking beyond the separate legal identity of an entity where that identity appears to be used to defeat the law, evade obligations, or conceal the real controlling persons. Courts do not apply this principle casually. Separate legal personality remains the normal rule. But where the record suggests that entity structures may have been used to frustrate the recovery of statutory dues, both the Department and the Court may examine the real substance behind the structure.
This aspect is important for GST recovery cases. Taxpayers may structure businesses through different entities for legitimate commercial reasons. However, where tax arrears remain unpaid and the record suggests that entities have been rearranged around the same controlling persons, both the Department and the Court may examine whether the corporate structure is being used to frustrate lawful recovery.
Connected Entities Need Real Separation, Not Mere Formal Separation
The ruling does not treat family ownership as wrongdoing. Many genuine businesses are family-controlled. The concern arises when unpaid tax dues, liquidation, resignations, new entities, substituted partners and bank attachments occur together in a manner that suggests statutory recovery may be defeated.
For business groups, the practical implication is clear. Separate entities should maintain genuine separation. Their accounts, contracts, business activities, management decisions and inter-entity transactions should be properly documented. If entities are used interchangeably, or if control shifts only on paper, the separate legal identity argument weakens in recovery litigation.
For the Department as well, corporate veil scrutiny requires care. Common family links alone should not be the sole basis for recovery from every connected entity. The file should show why the particular person, account, or entity is legally liable under Section 88(3), Section 79, or the principle of lifting the corporate veil.
Bank Attachment Must Match the Legal Basis
The petitioners also objected to the attachment of bank accounts, including overdraft and loan facilities. They argued that an overdraft or loan account is not the customer's money in the ordinary sense. It is a credit facility extended by the bank. Therefore, attaching such accounts can cause serious business disruption without necessarily recovering money held for the taxpayer.
This argument has practical force in many recovery cases. A current account with a positive balance and an overdraft facility are not the same. The legal and commercial character of each account may differ. However, in the present case, the Court did not grant relief on this basis. The broader recovery framework and the factual connections persuaded the Court not to interfere.
The point remains relevant for future disputes. Recovery authorities should carefully identify the nature of the account being attached. Taxpayers, for their part, should immediately place bank records on file to show whether the account contains the taxpayer’s money or merely represents a credit facility.
Natural Justice Cannot Be Invoked in the Abstract
The petitioners also alleged a violation of natural justice. The Department contended that the recovery action was not taken suddenly and that steps were taken only after the demand remained unpaid. The Court did not accept the natural justice objection as a ground to set aside the recovery proceedings.
The ruling indicates that once a statutory demand exists and the conditions for recovery are satisfied, the Department may proceed under Section 79. A separate prior warning before every bank attachment may not always be necessary. However, this does not mean that recovery can be arbitrary. The recovery action must still comply with the Act, the Rules and the factual basis recorded in the file.
In the present case, the Court found no reason to interfere with the recovery communications issued under Section 79(1)(c) read with Rule 145(1).
The Record Must Support Both Liability and Defence
For practical purposes, the ruling requires discipline on both sides. Directors must preserve records showing their actual role, responsibility and control during the tax period, because the defence under Section 88(3) must be proved before the Commissioner. If a director claims that the default was not due to neglect, misfeasance or breach of duty, the claim must be supported by documents.
At the same time, recovery authorities should clearly record the company in liquidation, the relevant tax period, the director’s connection with that period, the amount determined, the inability to recover from the company, and the basis for extending recovery to connected accounts or entities. Proper reasoning makes recovery action more defensible. Loose references to the company, firm, partners, and directors can lead to avoidable litigation.
The real lesson is that both recovery power and recovery defence are record-driven. The Department must build the legal foundation. The director must build the factual defence.
Recovery Cannot Be Escaped by Liquidation Alone
The Madras High Court has declined to interfere with the recovery notices. The ruling confirms that when a private company in liquidation fails to discharge GST dues, directors who were in office during the relevant tax period may be proceeded against under Section 88(3), subject to their statutory defence before the Commissioner.
It also shows that later resignations, connected entities, and separate legal identity may not, by themselves, prevent scrutiny of recovery where the record suggests common control or possible avoidance of tax arrears. Liquidation may close the company’s ordinary business life, but it does not automatically close the GST recovery route.
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