NCLAT rejects Section 9 petition as settlement with subsidiary doesn't create debt against holding company

NCLAT dismissed an appeal challenging rejection of Section 9 petition for CIRP initiation. Appellant claimed operational dues from Corporate Debtor as former employee, but settlement agreement was executed with subsidiary company MNT, not Corporate Debtor. NCLAT upheld lower court's finding that holding and subsidiary companies are separate legal entities per Vodafone SC judgment. No evidence of fraud or sham transactions warranting corporate veil piercing. Since disputed debt existed between parties, CIRP initiation was inappropriate under Mobilox SC precedent requiring undisputed debt for operational creditor applications.

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Issues Involved:

1. Employment relationship between the Appellant and Corporate Debtor.
2. Liability of Corporate Debtor to pay operational dues.
3. Existence of pre-existing dispute.
4. Applicability of the doctrine of privity of contract.
5. Relevance of the Vodafone judgment on the relationship between holding and subsidiary companies.

Summary:

1. Employment Relationship between the Appellant and Corporate Debtor:
The Appellant was appointed as General Manager by the Corporate Debtor on 10.10.2014. The Corporate Debtor failed to release timely salary payments from 2015 onwards, leading to the Appellant's resignation on 26.01.2016. The Appellant contended that he remained an employee of the Corporate Debtor until his resignation, supported by a full and final settlement statement admitting an outstanding amount of Rs. 9,28,972/- as debt due and payable.

2. Liability of Corporate Debtor to Pay Operational Dues:
The Appellant sent a Section 8 demand notice on 06.03.2019, followed by a Section 9 IBC application on 30.04.2019 for default of debt amounting to Rs. 9,97,747/-. The Adjudicating Authority dismissed the Section 9 petition, holding that the Appellant was employed by MNT Infrastructure Private Limited (MNT) and not the Corporate Debtor. The Appellant argued that the Corporate Debtor and MNT were controlled by the same management and hence liable for the dues, but the Adjudicating Authority found no evidence of employment with the Corporate Debtor.

3. Existence of Pre-Existing Dispute:
The Corporate Debtor contended that the Appellant was paid his salary regularly until his transfer to MNT. Legal notices exchanged between the parties in 2017 and 2018 indicated a pre-existing dispute regarding the Appellant's employment and dues. The Adjudicating Authority, relying on the Mobilox judgment, concluded that the disputes were pre-existing and not spurious, bluster, frivolous, or vexatious, thereby precluding the admission of the Section 9 application.

4. Applicability of the Doctrine of Privity of Contract:
The Corporate Debtor argued that it was not liable under the settlement deed signed between the Appellant and MNT, as it was not a party to the contract. The Adjudicating Authority upheld this contention, emphasizing that a third party cannot be made liable under a contract unless it is a party to the said contract.

5. Relevance of the Vodafone Judgment:
The Adjudicating Authority referred to the Vodafone judgment to assert that holding and subsidiary companies are separate legal entities. The judgment clarified that mere ownership or control by a holding company does not merge the legal identities of the two entities. The Adjudicating Authority found no grounds to pierce the corporate veil and hold the Corporate Debtor liable for the acts of its subsidiary, MNT.

Conclusion:
The Adjudicating Authority's reliance on the Vodafone judgment and the Mobilox judgment was deemed appropriate. The appeal was dismissed, affirming that the Corporate Debtor was not liable for the dues claimed by the Appellant, who was found to be an employee of MNT and not the Corporate Debtor. The Appellant was advised to seek other legal remedies if available.

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