The NCLAT Held that the third party cannot be held liable under a contract unless they are a direct party to it.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra & Indevar Pandey (Technical Members) was hearing an appeal and observed the legal principle of privity of contract. The NCLAT noted that a third party cannot be held liable under a contract unless they are a direct party to it.
The Appellate Tribunal further clarified that a holding company and its subsidiary are distinct legal entities, and the holding company does not assume the liabilities of the subsidiary. Shared ownership, control, or management between related companies is not sufficient grounds for holding one company liable for another's debts. The NCLAT also highlights the importance of genuine disputes in initiating insolvency proceedings, cautioning against the misuse of the Insolvency and Bankruptcy Code for mere debt recovery.
The appeal was filed under Section 61 of the Insolvency and Bankruptcy Code, 2016, arising from an order dated 02.03.2023 (the 'Impugned Order') by the National Company Law Tribunal, New Delhi Bench, Court-III, in CP(IB) No.1108/ND/2019. The Adjudicating Authority dismissed the Section 9 petition filed by the Appellant, seeking to initiate Corporate Insolvency Resolution Proceedings (CIRP) against the Corporate Debtor, M/s Collage Group Infrastructure Private Limited ('Collage'). The Appellant, an Operational Creditor, claimed unpaid salary dues from the Respondent.
The Appellant, appointed as General Manager in the Respondent's organisation on 10.10.2014, submitted his resignation on 26.01.2016, citing non-payment of salaries since 2015. The Respondent issued a full and final settlement statement, acknowledging an outstanding amount of Rs. 9,28,972/- as payable to the Appellant. The Appellant claimed to be an employee of the Respondent until his resignation and, hence entitled to the outstanding dues.
Despite some part payments, subsequent cheques issued by the Respondent were dishonoured. The Appellant sent a Section 8 demand notice on 06.03.2019, followed by a Section 9 application on 30.04.2019, claiming Rs. 9,97,747/- as default debt.
A settlement was reached between the Appellant and the Respondent, recorded before the Adjudicating Authority on 27.02.2020, withdrawing the Section 9 application with the liberty to revive it in case of settlement failure. Alleging a breach of settlement terms by the Respondent, the Appellant reopened the matter, leading to the Adjudicating Authority's rejection of the Section 9 application. The Adjudicating Authority held that the Appellant was not an employee of the Respondent but of MNT Infrastructure Private Limited ('MNT').
The Appellant contended that the Adjudicating Authority erred in rejecting the application, arguing that he was never an employee of MNT and that the Respondent and MNT were practically the same entity, as evidenced by a 100% shareholding between them and shared management.
The Respondent argued that the Appellant was paid regularly by the Respondent until March 2015, after which he was transferred to MNT, severing his contract with the Respondent. The Respondent emphasized that the settlement agreement was between the Appellant and MNT, not the Respondent, absolving the Respondent of any liability.
The Adjudicating Authority, relying on the Vodafone case, held that the Respondent and MNT are separate legal entities, and the Appellant's services were provided to MNT, not the Respondent. The Authority also found a pre-existing dispute between the parties, citing legal notices and replies prior to the Section 8 demand notice.
The Appellate Tribunal upheld the Adjudicating Authority's decision, concluding that the Appellant failed to prove operational debt against the Respondent. The NCLAT highlighted the principle of subsidiary companies as separate legal entities and rejected the appeal, stating that IBC should not be used as a debt recovery tool.