Unpaid Salary Cannot Trigger Insolvency If Converted Into Investment Through Settlement: NCLT Delhi

The National Company Law Tribunal (NCLT) at New Delhi, has recently ruled that salary dues converted into an investment/loan through a settlement cannot be treated as an operational debt under the Insolvency and Bankruptcy Code. The tribunal dismissed a Section 9 insolvency petition filed by a former director against a real estate company.

A bench of Judicial Member Bachu Venkat Balaram Das and Technical Member Dr Sanjeev Ranjan held that once unpaid salary is consciously recast as an investment carrying interest and a lock-in period, it loses the character of an operational debt under Section 5(21) of the Code.

"In the present case, the outstanding amount was converted with the consent of the Operational Creditor as investment to the Corporate Debtor vide Settlement cum investment certificate dated 01.11.2019. Therefore in the light of law laid down by the Hon'ble Supreme Court in the case of Global Credit Capital Ltd and Anr. V. Sach Marketing Pvt Ltd and the order passed by the Coordinate Bench in the case of Akshat Pandey V. Avighna Films Private Limited, we are of the considered view that outstanding amount in the present case do not fall within the purview of an Operational Debt under section 5(21) the Code", it said.

The insolvency plea was filed by one Dinesh Kumar Garg against Adwik Homes Private Limited. Garg joined the company as a manager in 2012, became a director in 2013, and resigned in January 2019. He claimed unpaid salary dues of Rs 40.25 lakh and alleged that he had additionally advanced Rs 13.60 lakh to the company.

According to Garg, the company had acknowledged these dues and issued a “settlement-cum-investment certificate” in November 2019. Under this settlement, the salary dues and the alleged advance were converted into an investment or loan. The settlement imposed a lock-in period of four years and five months and promised interest at 24% per annum, payable after March 31, 2024.

The company opposed the insolvency plea. It argued that the salary claim was time-barred as the salry was due in 2019 and three years have passed since. It also argued that the settlement certificate was forged. It also pointed out that no bank statements or documentary proof were produced to show payment of Rs 13.60 lakh, the amount allegedly advanced to the company.

The tribunal observed that, although an internal email had indeed acknowledged the existence of salary arrears, the subsequent settlement agreement unequivocally transformed the said amount into what was characterized as an investment or a loan. Furthermore, it was noted that Garg had failed to sufficiently demonstrate or establish any continuing or ongoing nexus with the employment relationship that persisted after this conversion had taken place.

Making reference to established precedents laid down by the Supreme Court, the tribunal reiterated and reaffirmed that operational debt must necessarily arise directly and immediately from the provision of goods, services, or employment.

In contrast, any arrangement that incorporates elements of interest and the time value of money is to be regarded as falling squarely within the nature of a financial transaction, and not operational debt.

The tribunal also proceeded to reject the parallel application filed under Section 65 of the IBC, which sought the imposition of penalties for the alleged fraudulent filing of the petition. It held that allegations pertaining to malice and fraud must be proved to the standard of beyond reasonable doubt.

Accordingly, the Section 9 CIRP plea, along with all connected or ancillary applications, was dismissed in its entirety.

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