The Allahabad High Court in Mr. Pranay Dhabhai v. State Of U.P. And Ors., in reference to its earlier decision in A.S. Solanki Vs. State of U.P., holds that directors of a company under liquidation are not personally liable for tax dues unless explicitly provided in a statute. The court emphasized that merely because a company fails to pay taxes does not justify piercing the corporate veil to hold directors accountable, unless there is evidence of fraud, malfeasance, or actions ultra vires.
In the case of A.S. Solanki, the court clarified that the doctrine of piercing the corporate veil should not be applied automatically to recover company debts from directors’ personal assets. It pointed out that directors, particularly those who are not shareholders and are hired for expertise, should not be held liable unless they are directly involved in wrongdoing or the law specifically allows for such liability.
The court further emphasizes that lifting the corporate veil should only happen when clear evidence shows that the corporate structure has been misused for fraudulent purposes, without undermining the legal concept of corporate personality conferred by statutes.
In the current case before the court, involving Pranay Dhabhai, a director of a company under liquidation facing tax demands, the court granted interim protection to Dhabhai. It directed that the tax authorities could proceed against the assets of the company under liquidation but not against Dhabhai’s personal assets, unless specific statutory provisions justified such action.