INVESTMENT MADE BY DIRECTOR OF A COMPANY IS NOT AN OPERATIONAL DEBT

Initiation of Corporate insolvency resolution process

The provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) provides for the corporate insolvency resolution process against a corporate debtor, in default, by the financial creditor or operational creditor or corporate applicant. 

Sections 9 and 10 of the Code provides for initiation of corporate insolvency resolution process against a corporate debtor by an operational creditor. 

Section 5(20) of the Code defines the expression ‘operational creditor’ as a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

Section 5(21) of the Code defines the expression ‘operational debt’ as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

Issue

The issue to be discussed in this article is as to whether a Director who invested some amount in the company would amount to operational debtor and whether he is entitled to file an application before the Adjudicating Authority for initiation of corporate insolvency resolution process against his company, the corporate debtor with reference to decided case law.

Case law

AKSHAT PANDEY VERSUS AVIGHNA FILMS PRIVATE LIMITED - 2022 (7) TMI 830 - NATIONAL COMPANY LAW TRIBUNAL , KOLKATA BENCH, the petitioner, as an operational creditor, filed an application under section 9 of the Code, for initiation of corporate insolvency resolution process against the corporate debtor Avighna Films Private Limited on 15.02.2021 on the ground that the corporate debtor failed to pay a sum of Rs.1,14,25,000/- before the Adjudicating Authority, Kolkata Bench.

The applicant submitted the following before Adjudicating Authority-

• The corporate debtor has two directors in their company.
• On 10.04.2019 the applicant has been appointed as Additional Director in the company of the corporate debtor for production of a movie.
• On 22.05.2019 one of the directors i.e., Ms. Sohini Ghosh entered into an agreement with one another company Editfx Studios Private Limited  to restrict any other person other than Ms. Sohini Ghosh to allow post production contents of the movie as well as restrain the director of the movie / cinema towards release of the movie / cinema as well as negation of the proposed return on investment to the Operational Creditor.
• Another Director Pujarini Ghosh did not accept the terms of agreement.  Therefore the negation of the proposed return on investment to the operational creditor came to an end.
• The applicant sent a letter under section 8 of the Code to the corporate debtor on 06.01.2021 to return his investment to him.
• Sohini Ghosh vide her notice dated 14 January, 2021 requested for settlement but without any payment.
• Till date the applicant did not receive any amount from the corporate debtor and so the present application.

The Corporate Debtor submitted before the Adjudicating Authority that the applicant is non compliant under the cost and he is not having locus standi to file the present application.  The applicant is trying to misuse the provisions of the Code.  He did not mention the default date in his application.  The application is time barred and on that ground itself the application is liable to be dismissed.  Further the applicant, in his application did not indicate the cause of action against the corporate debtor.

The Corporate Debtor was planning to produce a film.  The Corporate Debtor came to know that the applicant is also in the business of movie making.  The applicant by mutual consent became the director of the film proposed to be produced.  The Corporate Debtor further submitted that the applicant expressed his interest to the Board of Directors of the Corporate Debtor to be part of the film making and came forward to invest in the production of the said film.  However he abandoned himself before the release of the film.

The Corporate Debtor had promised the directors to provide funding for the pre-production till the theatrical release of the film but he did not honor his investment. This action of the applicant led to loss of the Corporate Debtor.  The applicant will not fall under the category of ‘operational creditor’ and therefore the application is not maintainable under the Code.

The Adjudicating Authority heard the submissions of the parties and also analyzed the documents relied on by the parties.  The Adjudicating Authority framed the issue for its decision as to whether an investment made by the Director of the Company falls under the definition of Operational Debt?

The Adjudicating Authority analyzed the provisions of the Code relating to operational creditor.  The Adjudicating Authority observed that it is clear from the definition of the expression ‘operational debt’ to consider a debt as an operational debt it is to be confined in the following categories-

• Goods, or;
• Services (including employment), or;
• a debt in respect of the re-payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority

In this instant matter the applicant, who is also one of the directors of the Corporate Debtor, invested money in the Corporate Debtor for production of a movie. In light of the above facts and circumstances we are of the view that an Investment made by the director of the Company does not fall under the purview of an Operational Debt under the Code.  The Adjudicating Authority dismissed the application filed by the applicant.  However the Adjudicating Authority held that the applicant is at liberty to pursue his remedy under any other law.

Conclusion

From the above discussion it is clear that investment made by Director or anybody will not amount to operational creditor and he is not eligible to file an application before the Adjudicating Authority to initiate corporate insolvency resolution process.  The Code is not for his remedy and he has to take remedial action under the suitable law and before the suitable form.