No Operational Debt for Director Without Independent Remuneration Approval; Pre-Existing Dispute Bars Section 9 IBC Petition
- REEDLAW
- 3 days ago
- 3 min read
NCLAT held that no operational debt arises in favour of a director in the absence of independent board-approved remuneration, and that the existence of a pre-existing dispute bars admission of a petition under Section 9 of the Insolvency and Bankruptcy Code.
On 07-05-2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Arun Baroka (Technical Member), reviewed an appeal and held that where a director’s remuneration is contingent upon their employment role (such as CFO), and there is no board resolution or contractual provision authorizing separate compensation for directorship, any claim for such remuneration after termination of employment does not constitute operational debt under the Insolvency and Bankruptcy Code, 2016. Consequently, the existence of a pre-existing employment dispute renders an application under Section 9 of the Code non-maintainable.
The legal issue in Company Appeal (AT) (Insolvency) No. 353 of 2020 arose from the dismissal of a Section 9 application under the Insolvency and Bankruptcy Code, 2016, by the National Company Law Tribunal (NCLT), New Delhi. The NCLT, through its order dated January 29, 2020, held that the Appellant’s claim for outstanding dues was based on an employment dispute and that a pre-existing dispute barred the application under Section 9(5)(ii)(d) of the Code. The Appellant had filed the application asserting operational debt on account of unpaid salary after cessation of his role as Chief Financial Officer (CFO), but during the period when he allegedly continued as a Whole-Time Director (WTD) of the Respondent company.
Upon appeal, the National Company Law Appellate Tribunal (NCLAT) initially reversed the NCLT’s findings on August 25, 2022, concluding that the existence of a writ petition did not amount to a valid dispute under the Code. The Appellate Tribunal then held that the Appellant, having served as WTD from April 1, 2019, to May 20, 2019, post his CFO termination, was entitled to emoluments for that period. This, it held, constituted operational debt under the Code, and the case was remanded for admission and further proceedings.
However, the Hon’ble Supreme Court, in Civil Appeal No. 5923 of 2022, set aside the NCLAT’s decision by order dated August 14, 2024. The Apex Court remitted the matter back to the NCLAT, directing it to re-examine whether there was any entitlement to salary for the Appellant's directorship after his CFO role ended, especially in the absence of clear documentary evidence to that effect.
Pursuant to the Supreme Court’s directions, the NCLAT reheard the matter and thoroughly assessed the employment contract, board resolutions, Form MR-1, payment records, and the Articles of Association. It was established that the Appellant’s WTD designation stemmed solely from his position as CFO and that there was no independent basis or board-approved resolution entitling him to separate remuneration as a Director. The Tribunal noted that Form MR-1 was merely a statutory disclosure document and could not substitute for substantive proof of entitlement.
The Tribunal found that the Appellant did not perform any duties as a Director after March 1, 2019, and had raised objections to his termination immediately through legal notices and a writ petition, indicating the existence of a pre-existing dispute. The financial disclosures cited by the Appellant were found to reflect salary paid in his capacity as CFO, not as a Director. As such, his claim for additional remuneration post-termination was not supported by any evidence or governing company resolutions.
Accordingly, the NCLAT concluded that the Appellant’s claim did not qualify as an operational debt under the IBC and reaffirmed that the dispute was contractual in nature, governed by the employment agreement. In the absence of clear entitlement or unpaid dues arising in the course of business transactions, the appeal was dismissed, and the order of the Adjudicating Authority rejecting the Section 9 application was upheld.
Mr. Anshit Aggarwal, Mr. Vishal Ganda, Mr. Ayandev Mitra and Ms. Charmi Khurana, Advocates, represented the Appellant.
Mr. Ritin Rai, Sr. Advocate with Mr. Shankh Sengupta, Mr. Sujoy Sur and Mr. Shreyash Sharma, Advocates, appeared for the Respondent.
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