Salary During Notice Period Does Not Fall Within The Definition Of ‘Operational Debt’ Under IBC: NCLT, Mumbai

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The NCLT, Mumbai Bench comprising of Justice H.V. Subba Rao, Judicial Member and Chandra Bhan Singh, Technical Member in the case of Sandesh Naik v. MT Educare Limited held that salary for purported notice period amounts to specific performance of the appointment letter and does not fall within the definition of ‘Operational Debt’ as the same was not salary for the actual work done by the Operational Creditor.

Factual Background-

The Operational Creditor/Applicant filed an application u/s 9 of the Insolvency and Bankruptcy Code, 2016 read with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudication Authority) Rules, 2016 for initiation of CIRP against the Corporate Debtor/ Respondent, M/s. MT Educare Ltd. for resolution of the Operational Debt owed to him to the tune of Rs. 22,41,735.

The Applicant was employed by the Respondent as its Chief Financial Officer. The Applicant resigned from his job and addressed several emails to the Corporate Debtor seeking payment of his dues.

Subsequently, the Respondent confirmed the termination of employment of the Operational Creditor and acknowledged his liability and agreed to full and final settlement of dues owed to the Applicant.

The Applicant issued a demand notice u/s 8 of the Code, in reply to which the Respondent admitted its liability to the tune of Rs. 7,26,626 and sent a cheque of the admitted amount. The Applicant demanded the balance due to him from the Respondent, for which he placed reliance on an appointment letter which provided for a notice period of 3 months or salary in lieu of the purported notice period of 3 months.

The Respondent contended that the appointment letter on which the Applicant is relying upon is a forged and fabricated document and that as per original appointment letter, the standard resignation policy provided that the Applicant’s term would expire within 30 days, which shall be the notice period and he shall be entitled to the salary of the said period only. In the reply, the Respondent also stated that as per the original appointment letter, the OC shall be entitled to only one month’s notice and not 3 months, as alleged, and thus the cheque amount is for full and final settlement of the amount due.

Decision Of The Tribunal-

The NCLT dismissed the Section 9 application filed by the Operational Creditor on the ground that there existed a dispute between the parties which ought to be adjudicated upon by leading evidence and conducting trials before the competent court and that the Applicant cannot use the IBC as a substitute of debt enforcement procedures.

The Tribunal noted that in the present case, there existed a dispute with respect to the alleged liability of the Corporate Debtor due to alleged discrepancies in the appointment letter, which were in existence prior to the date of issuance of the Demand Notice under the Code.

It relied on the decision of the Supreme Court in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., wherein it was held that-

“what the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exits in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application.”

As regards whether the amount due as salary of the alleged notice period of 2 months classifies as ‘Operational Debt’ under the Code, the Tribunal held that the same does not amount to Operational Debt as it was not salary for the actual work done by the Operational Creditor and was in fact, specific performance of the appointment letter.

Dismissing the petition, the Bench observed that the remedy of the Operational Creditor is to initiate necessary legal proceedings for recovery before the appropriate legal forum and not under the IBC.

Sandesh Naik v. MT Educare Ltd.

Counsel for Applicant: Adv. Pooja Batia

Counsel for Respondent: Adv. Nausher Kohli

Source: Live Law

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