Operational creditor's CIRP application rejected as performance pay deemed variable factor under Section 9 IB Code

The NCLAT Chennai dismissed an appeal challenging rejection of a CIRP application under Section 9 of the IB Code. The appellant, an operational creditor, claimed performance pay from the corporate debtor but issued both Form 3 and Form 4 notices under Section 8, indicating uncertainty about the claim's nature. The tribunal held that performance pay requiring subjective assessment based on policy criteria constitutes a variable factor, not falling within operational debt definition under IB Code. The issuance of multiple forms demonstrated the appellant's confusion about claim classification, making the demand indeterminate and unsuitable for CIRP initiation.

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Issues Involved:

1. Whether the claim for performance pay constitutes an "operational debt" under the Insolvency and Bankruptcy Code (I&B Code).
2. Whether the appellant qualifies as an "Operational Creditor" under the I&B Code.
3. Whether the initiation of proceedings under Section 9 of the I&B Code was justified.
4. The implications of issuing demand notices under both Form 3 and Form 4.

Detailed Analysis:

1. Claim for Performance Pay as "Operational Debt":

The appellant, an Operational Creditor, claimed entitlement to performance pay for the financial year 2017-18, arguing that it constituted an "operational debt" under Section 5(21) of the I&B Code. The appellant contended that the performance pay was part of his employment dues, thus falling within the definition of "operational debt," which includes claims related to employment.

The respondent, the Corporate Debtor, opposed this, arguing that the performance pay did not qualify as an operational debt because it was not a fixed payment arising from the provision of services or under any law. The performance pay was subject to various performance assessments and company policies, making it a variable and subjective claim, not a settled debt.

The judgment concluded that the performance pay did not meet the criteria of an operational debt as it was not a predetermined or settled amount. The determination of performance pay involved subjective criteria and variable factors, which did not fit within the statutory definition of "debt" under the I&B Code.

2. Qualification as an "Operational Creditor":

The appellant argued that he qualified as an Operational Creditor under Section 5(20) of the I&B Code, as his claim was related to employment. However, the Corporate Debtor challenged this, stating that the appellant did not meet the criteria because no debt was owed or legally assigned to him.

The tribunal found that the appellant did not qualify as an Operational Creditor. The claim for performance pay was not a liability or obligation that fit the definitions of "debt" or "operational debt" under the I&B Code. The tribunal emphasized that only settled and predetermined employment dues could qualify under these definitions.

3. Justification for Proceedings under Section 9:

The appellant initiated proceedings under Section 9 of the I&B Code after issuing notices under Section 8, claiming the performance pay as a debt. The tribunal examined whether this initiation was justified given the nature of the claim.

The tribunal held that the proceedings under Section 9 were not justified. The claim for performance pay was not a determined or settled debt, and its variable nature did not support the initiation of insolvency proceedings. The tribunal stressed that a claim must be a clear and undisputed debt to warrant such proceedings.

4. Issuance of Demand Notices under Form 3 and Form 4:

The appellant issued demand notices using both Form 3 and Form 4, which serve different purposes under the I&B Code. Form 3 requires the submission of an invoice, while Form 4 does not, provided sufficient documentation is attached.

The tribunal noted that the appellant's use of both forms indicated uncertainty about the nature and classification of the claim. This uncertainty further undermined the justification for treating the claim as an operational debt. The tribunal concluded that the issuance of multiple forms did not meet the procedural requirements for a clear and distinct demand under the I&B Code.

Conclusion:

The tribunal dismissed the appeal, affirming the decision of the National Company Law Tribunal (NCLT) to reject the claim. It held that the performance pay did not constitute an operational debt, the appellant was not an Operational Creditor, and the initiation of proceedings under Section 9 was unjustified. The tribunal's decision was based on the variable and subjective nature of the performance pay, which did not meet the statutory definitions required for insolvency proceedings under the I&B Code.

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