Performance Pay Does Not Qualify As Operational Debt For Which Proceedings U/S 9 Of IBC Cannot Be Initiated: NCLAT

The NCLAT Chennai bench of Justice Sharad Kumar Sharma (Judicial Member) and Jatindranath Swain (Technical Member) has held that a variable claim like performance pay which is not certain and has to be determined based on the performance of the employee will not be an operational debt as it is not the payment due therefore proceedings under section 9 of the IBC cannot be initiated for such a claim. Brief Facts The Respondent, that is, the alleged Corporate Debtor (CD), is a company which stands registered under the name and style of M/s. Nagarjuna Group, which consists of various other subsidiary entities. The Appellant was transferred from one company to another and finally transferred to the company, M/s. Nagarjuna Fertilisers and Chemicals Limited, which is the alleged Corporate Debtor, where he continues to work till he superannuated on 30.04.2018. By an office memorandum dated 08.09.1994, and consequent to the order of transfer, the Operational Creditor was appointed as the Assistant Company Secretary of the Corporate Debtor vide appointment order dated 12.09.1994. The Appellant contends that, he would be entitled for the payment of performance pay @ 15% of the CTC in terms of the letter dated 04.08.2017 of the Corporate Debtor and hence, his performance pay ought to have been determined and paid as per the policy of the corporate debtor. The Operational Creditor has submitted that prior to the initiation of the proceedings under Section 9 of the I & B Code, he had issued notices under Section 8 of the I & B Code on 27.01.2020, by way of issuance of Form 3 & Form 4, raising a demand with regards to the anticipated performance pay for the financial year 2017-18. After issuance of the notice when the said amount was not paid to the Operational Creditor within the prescribed time, he was constrained to initiate a proceeding under Section 9 of the Code, by filing the same on 13.02.2020, which stood adjudicated by the Impugned Order dated 02.05.2024, in the order, which is under challenge before this Tribunal whereby the application preferred by the Operational Creditor, (the Appellant herein) under Section 9 of the Code has been rejected. Contentions The respondent submitted that the claim of performance pay in respect of which the Appellant has raised the claim will not fall within the ambit of definition of operational debt, as it has to be determined based on the assessment of the employee and it was not a payment due to him arising out of provision of his services to the corporate debtor, or a payment which was due arising under any law for the time being in force. That the Appellant would not be falling within the definition of the Operational Creditor, as he does not satisfy the criterion of an Operational Creditor as defined under Section 5(20), because no debt was owed to him by the corporate debtor or has been legally assigned or transferred to him The appellant submitted that if the definition of Sub-Section 21 of Section 5 of the I & B Code, is taken into consideration, where it deals with the definition of operational debt, it includes within in a claim in respect of the provisions of goods or services including “employment”. That since the definition of operational debt is inclusive of the word employment as used therein, his claim as it has been raised in the notices issued under Section 8 of the I & B Code will be falling well within the ambit of the claim, which could be satisfied by the initiation of proceedings under Section 9 of the Code. NCLAT's Analysis The tribunal while agreeing with the submissions of the respondent noted that the performance pay is not a prefixed criteria or a settled service benefit, which a person could be entitled to receive. The tribunal further noted that it is subject to satisfying the criteria which has to be determined upon performance of work, based upon the criteria of performance assessment provided as in the present case, policy for the financial year 2017-18 dated 24.04.2018 is in place where itself various classifications have been made with regards to the percentage of entitlement of performance pay. Based on the above the tribunal came to the conclusion that the amount claimed by the Appellant in his notice issued under Section 8, will fall to be a variable factor and that will not fall to be within the definition of the “operational debt” or even a “debt” as defined under the Code and thus the denial of the same by the Learned Adjudicating Authority cannot be said to be irrational or without an application of mind. The tribunal agreed with the observations of the Adjudicating Authority that while sending demand notices under section 8 of the IBC, either form 3 or 4 has to be sent as per Application to Adjudicating Authority Rules. If the form 3 is sent, invoices showing the existence of debt have to be attached as it is...

Performance Pay Does Not Qualify As Operational Debt For Which Proceedings U/S 9 Of IBC Cannot Be Initiated: NCLAT

Mohd Malik Chauhan

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Performance Pay Does Not Qualify As Operational Debt For Which Proceedings U/S 9 Of IBC Cannot Be Initiated: NCLAT

Mohd Malik Chauhan

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