Employment Contract Disputes Cannot Be Adjudicated By NCLT/NCLAT Under IBC: NCLAT

The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member) and Mr. Arun Baroka (Technical Member) has held that a dispute arising from an employment contract concerning the determination of emoluments and salaries to be paid to an employee of a company after his termination cannot be adjudicated by the National Company Law Tribunal (NCLT) or the NCLAT under the Insolvency and Bankruptcy Code, 2016 (Code). Brief Facts: The present appeal has been filed by Akhilesh Kulshrestha (Appellant) under Section 61 of the Code challenging the order dated January 29, 2020, passed by the National Company Law Tribunal, New Delhi (“Adjudicating Authority”) in C.P. (IB) 1972 of 2019. The Appeal was allowed on August 25, 2022, and the matter was remanded to the Adjudicating Authority for appropriate orders following admission of the Section 9 application. M/s SAAB India Technologies Private Limited (Respondent) challenged this order by filing Civil Appeal No. 5923 of 2022 before the Supreme Court, which, by its order dated August 14, 2024, remanded the matter back to this Appellate Tribunal to determine whether, after relinquishing his position as Chief Financial Officer (CFO), the Appellant was entitled to the same salary and benefits solely in his capacity as a Director. The Supreme Court directed the parties to reargue the matter with relevant supporting documents. Contentions: The Appellant submitted that the Respondent has failed to pay the salary and other dues amounting to ₹30,01,999/- for the period from March 2, 2019 to May 20, 2019, during which the Appellant claims he continued to serve as a Director, despite the termination of his services as CFO. It was further submitted that documents submitted by the Respondent before various statutory authorities reflect that he was drawing a salary in a dual capacity as Whole-Time Director (WTD) and Chief Financial Officer. Per contra, the Respondent submitted that the Appellant was only liable to be paid the salary of ₹9,50,000 per month as the Respondent's CFO, in accordance with the Employment Contract, and no remuneration was separately payable to the Appellant for the position of a Whole-time Director. Observations: The Tribunal at the outset noted that Form No. MR-1 is a statutory filing required under the Companies Act, 2013, upon the appointment of a director. The form does not indicate that the Appellant was receiving separate compensation for his role as 'Whole-Time Director'. Based on the above, while accepting the appellant's submissions, it held that the designation of 'Whole-Time Director' was selected in Form No. MR-1 among other roles including CFO—solely because the form permits only one designation to be chosen. The stated annual salary of ₹86,49,600/- represents his total remuneration, not an additional payment for the directorship. It further added that MR-1 is a disclosure form, which discloses all monies paid to the Appellant, who was a director in the company and does not prove that the monies were paid to him for being a director. The Tribunal also noted that as per article of association, the payment of remuneration to the Appellant as a Whole-time Director had to be approved by way of a resolution passed by the Board of Directors. However, no such resolution passed by the Board is placed on record, which can help the Appellants' case. It further noted that no document was placed on record demonstrating that the Board had approved payment of remuneration to the Appellant for his position as a Director. Appellant's reliance on Article 49 of the AoA, is also misplaced as Article 49 does not provide for payment of remuneration to a Whole-time Director as a matter of course. The Tribunal further noted that the Appellant was removed as a WTD on 20 May 2019, following due process, approximately 2 months and 20 days after the termination of his employment contract. While the employment termination was effective immediately upon payment of three months' salary in lieu of notice, his removal as Director was carried out through a Board resolution, in accordance with the requirements of the Companies Act. Based on the above, it held that the Appellant did not discharge any directorial duties during this period and is, therefore, not entitled to any additional compensation. It further opined that the Appellant was appointed as WTD solely by virtue of his role as CFO. His employment was terminated in accordance with Clause 8.1 of the employment contract, and all dues, including three months' salary in lieu of notice, were duly paid. Based on the above, it held that once he ceased to be CFO, it is inconceivable that he could have continued as a WTD. Notably, there is no evidence of a separate appointment as WTD or any material indicating that separate remuneration was payable for that role. ...

Employment Contract Disputes Cannot Be Adjudicated By NCLT/NCLAT Under IBC: NCLAT

Mohd Malik Chauhan

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