The Chennai bench of the National Company Law Appellate Tribunal ( NCLAT ) has held that Proceedings under section 9 of Insolvency Bankruptcy Code ( IBC ), 2016 cannot be initiated against performance pay as it does not amount to operational debt.
The Respondent, the alleged Corporate Debtor ( CD ), is a company which stands registered under the name and style of M/s. Nagarjuna Group, which consists of various other subsidiary entities. M Ramakanth , the Appellant was transferred from one company to another and finally transferred to the company, M/s. Nagarjuna Fertilisers and Chemicals Limited, which is the alleged Corporate Debtor, where he continues to work till he superannuated on 30.04.2018.
By an office memorandum, the Operational Creditor was appointed as the Assistant Company Secretary of the Corporate Debtor vide appointment order dated 12.09.1994. The Appellant contended that, he would be entitled for the payment of performance pay @ 15% of the CTC in terms of the letter dated 04.08.2017 of the Corporate Debtor and hence, his performance pay ought to have been determined and paid as per the policy of the corporate debtor.
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The Operational Creditor has submitted that prior to the initiation of the proceedings under Section 9 of the I & B Code, he had issued notices under Section 8 of the I & B Code on 27.01.2020, by way of issuance of Form 3 & Form 4, raising a demand with regards to the anticipated performance pay for the financial year 2017-18.
After issuance of the notice when the said amount was not paid to the Operational Creditor within the prescribed time, he was constrained to initiate a proceeding under Section 9 of the Code, by filing the same on 13.02.2020, which stood adjudicated by the Impugned Order dated 02.05.2024, in the order, which is under challenge before this Tribunal whereby the application preferred by the Operational Creditor, (the Appellant herein) under Section 9 of the Code has been rejected.
It was viewed that since the definition of operational debt is inclusive of the word employment as used therein, his claim as it has been raised in the notices issued under Section 8 of the I & B Code will be falling well within the ambit of the claim, which could be satisfied by the initiation of proceedings under Section 9 of the Code.
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The tribunal noted that the performance pay is not a prefixed criteria or a settled service benefit, which a person could be entitled to receive. It was noted that it is subject to satisfying the criteria which has to be determined upon performance of work, based upon the criteria of performance assessment provided as in the present case, policy for the financial year 2017-18 dated 24.04.2018 is in place where itself various classifications have been made with regards to the percentage of entitlement of performance pay.
The Tribunal concluded that the amount claimed by the Appellant in his notice issued under Section 8, will fall to be a variable factor and that will not fall to be within the definition of the “operational debt” or even a “debt” as defined under the Code and thus the denial of the same by the Adjudicating Authority cannot be said to be irrational or without an application of mind.
The tribunal agreed with the observations of the Adjudicating Authority that while sending demand notices under section 8 of the IBC, either form 3 or 4 has to be sent as per Application to Adjudicating Authority Rules. If the form 3 is sent, invoices showing the existence of debt have to be attached as it is mandatory. Whereas when form 5 is sent, it is not mandatory provided the documents sent along with the notice demonstrate the existence of the debt.
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The bench of Justice Sharad Kumar Sharma (Judicial Member) and Jatindranath Swain (Technical Member) observed that since it was a variable claim, which will depend upon a subjective satisfaction and its quantification, as was based upon the determination, which has to be made on a computation of a right based on the criteria, the claim as raised by the Operational Creditor, in the proceedings of the Company Petition, will not be an operational debt and hence drawing of a proceedings by invocation of Section 9 will not be justified, to bring a Corporate Debtor to face the CIRP proceedings.
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