Performance Pay Does Not Qualify As Operational Debt For Which Proceedings U/S 9 Of IBC Cannot Be Initiated: NCLAT

Brief Facts

The Respondent, that is, 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.

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 dated 08.09.1994, and consequent to the order of transfer, the Operational Creditor was appointed as the Assistant Company Secretary of the Corporate Debtor vide appointment order dated 12.09.1994.

The Appellant contends 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.

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.

Contentions

The respondent submitted that the claim of performance pay in respect of which the Appellant has raised the claim will not fall within the ambit of definition of operational debt, as it has to be determined based on the assessment of the employee and it was not a payment due to him arising out of provision of his services to the corporate debtor, or a payment which was due arising under any law for the time being in force.

That the Appellant would not be falling within the definition of the Operational Creditor, as he does not satisfy the criterion of an Operational Creditor as defined under Section 5(20), because no debt was owed to him by the corporate debtor or has been legally assigned or transferred to him

The appellant submitted that if the definition of Sub-Section 21 of Section 5 of the I & B Code, is taken into consideration, where it deals with the definition of operational debt, it includes within in a claim in respect of the provisions of goods or services including “employment”.

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.

NCLAT's Analysis

The tribunal while agreeing with the submissions of the respondent noted that the performance pay is not a prefixed criteria or a settled service benefit, which a person could be entitled to receive.

The tribunal further 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.

Based on the above the tribunal came to the conclusion 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 Learned 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.

The tribunal further noted that this aspect was not satisfied by the Operational Creditor while issuing the notices under Section 8 of the I & B Code and thus the analogy which has been drawn by the Learned Adjudicating Authority while rejecting the claim is justified.

Based on the above, the tribunal noted that the Adjudicating Authority was right in coming the conclusion that sending of the notices under Form 3, as well as under Form 4, that itself depicts that the Appellant was not very sure about the nature of the claim and its classification, under which he was raising because he himself has not been able to classify as to under which form of debt, would his claim towards the performance pay, would lie

The tribunal noted that the Adjudicating Authority in the impugned judgment further observed that thus issuance of two forms, i.e., Form 3 and Form 4, since they intend to meet a difference objective, as it has been dealt with in the Impugned Judgment, the claim raised by the Appellant Operational Creditor will not fall to be payable by the issuance of multiple formulated notices under Section 8 of the Code and it cannot be taken as to be an operational debt for the purposes of invocation of the proceedings under Section 9 for drawing a CIRP proceedings against the Corporate Debtor.

The tribunal concluded that the claim raised by the Appellant 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.

Case Title: M Ramakanth v. M/s. Nagarjuna Fertiliser and Chemicals Limited

Case Reference:Company Appeal (AT) (CH) (Ins) No.213/2024

Judgment Date: 21/11/2024

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