Recovery from company directors only possible after winding up: HC  

The Punjab and Haryana High Court has ruled that recovery of dues from directors of a private company can only be made after the company is wound up as per the provisions of the Companies Act.

The Division Bench of Justice Sanjeev Prakash Sharma and Justice Sanjay Vashisth also quashed an attachment order freezing the bank accounts of a former director, holding the action to be arbitrary and without legal basis.

Observing that the wrongful attachment order caused unnecessary financial distress, the Bench also imposed penal cost of Rs 1 lakh on the authorities concerned.

The amount was directed to be deposited in the petitioner’s account within two months. Failure to comply would attract an interest rate of 18 per cent, recoverable from the “delinquent officer, who has arbitrarily issued attachment order without authority”.

The judgment came in response to a writ petition filed against Assistant Collector First Grade-cum-Excise & Taxation Officer, UT Chandigarh, by Sandeep Sood through senior advocate Radhika Suri with Abhinav Narang and Parnika Singla.

The petitioner had challenged the attachment of his savings accounts for recovering VAT dues of M/s East Bourne World Cuisine Private Limited, where he was a former director.

Referring to Section 83(3) of the Punjab Value Added Tax Act, 2005, the Bench asserted that the provision permitted the recovery from directors only after the company was wound up.

Citing a Supreme Court decision, the Bench observed: “The recovery from the director of a company can only be made when such a company has been wound up. Even under the Companies Act, 1956, the provision for recovery from the director is not available at the stage prior to winding up of the company.”

The Bench said the company had itself filed an appeal before the appellate authority, which was still pending. Besides, the company was functional and the petitioner was no more its director. “In the circumstances, there was no occasion for the respondent to attach the bank accounts of the petitioner for recovery of its dues as against the company concerned,” the court observed.

Before parting with the order, the Bench observed that there were no allegations regarding the company’s mismanagement. In such circumstances also, the order would have to be obtained from the National Company Law Tribunal (NCLT) concerned.

The Bench added it had earlier also directed the respondent to decide the company’s appeal, but it had till date not been finalised. “Be that as it may, the fact should not detain us from declaring the attachment of the saving accounts of the petitioner bad in law as we find that it is a clear case of arbitrary exercise of power by the respondent and is wholly without any authority,” the Bench asserted.