2024 (11) TMI 1054 - AT - IBC

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

M Ramakanth Versus M/s. Nagarjuna Fertiliser and Chemicals Limited

The NCLAT Chennai dismissed an appeal challenging rejection of a CIRP application under Section 9 of the IB Code. The appellant, an operational creditor, ... Maintainability of application - initiation of CIRP u/s 9 of the I&B Code - performance pay - Operational Debt or not - Operational Creditor or not - issuance of Section 8 notice - HELD THAT:- Where a payment of a financial debt owing to the employment, if it is required to be arithmetically determined during the proceedings based upon a subjective satisfaction and application of criteria of performance pay, based upon the policy as referred to by the Learned Counsel for the Respondent i.e., 06.01.2019, that has to be read with the criteria of assessment of performance pay dated 24.04.2018, 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 I & B 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. There is yet another aspect which is required to be taken into consideration, its that at the stage of initiation of proceedings the issuance of demand notices under Section 8 of the I & B Code, which is a condition precedent for raising a determined demand for the claim, which is falling within the purview of debt or an operational debt herein, the Appellant admittedly has issued Form 3and Form 4. In fact, the two forms provided under rules, of the raising of a demand they altogether intend to meet a distinct objective accordingly it classifies the demand itself. The rules prescribe that the Operational Creditor can send a demand notice, either in Form 3 or in Form 4 as contemplated under Section 8 of the I & B Code, which is to be read with Rule 5 of the I & B Code, as well as the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules 2016. The Learned Adjudicating Authority while considering the claim has further observed, that the 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 and 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 I & B 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 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 and particularly when the Appellant himself was not very sure enough, that it was not a determined claim of a debt, which was being raised before the Learned Adjudicating Authority and hence the rejection of the claim by virtue of the Impugned Order, which is under challenge i.e., dated 02.05.2024, as it has been rendered in petition, do not suffer from any apparent illegality which may call for an interference in the exercise of ours Appellate Jurisdiction under Section 61 of the I & B Code, 2016 and thus the reason which has been assigned by the Learned Adjudicating Authority is absolutely justified. This Appeal lacks merit and the same is accordingly dismissed. 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.