NCLAT Rules, Employment Contract Disputes Cannot Be Adjudicated By NCLT/NCLAT Under IBC
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Arun Baroka (Technical Member), has held that disputes arising from employment contracts regarding salaries or emoluments are outside the scope of adjudication under the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal emphasized that such disputes, particularly when governed by arbitration clauses and concerning employment terms, are contractual in nature and cannot be the basis for initiating insolvency proceedings.
Background of the Case
The appeal was filed by Mr. Akhilesh Kulshrestha under Section 61 of the IBC challenging an order dated January 29, 2020, passed by the National Company Law Tribunal (NCLT), New Delhi, which had dismissed his application under Section 9 of the IBC filed as an Operational Creditor. Mr. Kulshrestha claimed unpaid dues of ₹30,01,999 from M/s SAAB India Technologies Private Limited for the period from March 2, 2019, to May 20, 2019—after his termination as Chief Financial Officer (CFO), during which he continued to serve as a Whole-Time Director (WTD).
Initially, the NCLAT had allowed the appeal and remanded the matter to the NCLT, directing admission of the Section 9 application. However, this order was challenged before the Hon’ble Supreme Court by the company. By order dated August 14, 2024, the Supreme Court set aside the earlier NCLAT order and remanded the matter back to the Tribunal to determine whether the appellant was entitled to salary or benefits for his role as Director after his employment as CFO ended.
Facts and Contentions
Mr. Kulshrestha was appointed as CFO of the respondent company effective May 1, 2014. He was later appointed as Additional Director in March 2015 and as WTD on September 29, 2015. His employment was governed by a contract dated March 10, 2014, which included an arbitration clause for dispute resolution and provisions for termination, including payment of three months’ salary in lieu of notice.
The company terminated his employment as CFO on March 1, 2019, citing redundancy, and paid him all dues, including notice pay and gratuity. However, he continued to hold the position of WTD until his removal by a resolution dated May 20, 2019. It was during this period—from termination of employment until removal as WTD—that Mr. Kulshrestha claimed entitlement to salary.
The appellant argued that documents submitted to statutory authorities, including Form MR-1, reflected that he was remunerated in his dual capacity as CFO and Director. He relied on Articles 48 and 49 of the company’s Articles of Association (AoA) to argue entitlement to remuneration as WTD.
The company contended that the appellant was appointed as WTD only by virtue of his role as CFO and was never paid separately for being a Director. They emphasized that no Board resolution was passed approving any such payment, and that it was not the company’s practice to remunerate employees separately for sitting on the Board. They also relied on the arbitration clause in the employment contract to argue that the dispute should be resolved through arbitration.
Tribunal’s Observations
The NCLAT undertook a thorough examination of the employment contract, board resolutions, Articles of Association, statutory filings, and the sequence of events. It noted that:
The appellant was appointed as WTD only because he was already employed as CFO.
Form MR-1, relied upon by the appellant, is a disclosure form under the Companies Act, 2013, and does not prove separate compensation for a directorship.
There was no Board resolution or document authorizing payment of remuneration for his role as WTD.
Articles 48 and 49 of the AoA clearly state that any remuneration to a Director must be approved by the Board, which was not done.
The appellant was paid full dues, including three months' salary in lieu of notice, as per the employment contract.
The appellant had never previously claimed separate remuneration for being a WTD during his tenure.
No documents showed that the appellant performed any directorial duties during the disputed period post-termination.
The Tribunal added that there was no material to suggest the appellant had a separate appointment as WTD independent of his CFO role. Consequently, once he ceased to be CFO, his position as WTD was no longer tenable.
Dispute Not Maintainable Under IBC
The NCLAT stressed that the relationship between the appellant and the company arose from an employment contract and the dispute was purely contractual, involving questions of entitlement under employment terms. The Tribunal cited Clause 9 of the contract, which mandates binding arbitration for any disputes.
Further, the Tribunal referred to the precedent laid down in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353, reaffirming that the existence of a pre-existing dispute, especially involving contractual interpretation, is sufficient to reject an insolvency application under Section 9(5)(ii)(d) of the Code. The Tribunal concluded that the appellant’s claim was not operational debt within the meaning of the IBC, and that insolvency proceedings cannot be used as a substitute for enforcing employment claims.
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Accordingly, the NCLAT dismissed the appeal and held: “There is a pre-existing dispute between the parties, and this could not have been resolved by the NCLT under the Code. The present dispute arises out of the employment contract and is contractual in nature and cannot be raised under the Code.”
Appearance
For Appellant: Mr. Anshit Aggarwal, Mr. Vishal Ganda, Mr. Ayandev Mitra and Ms. Charmi Khurana, Advocates
For Respondent: Mr. Ritin Rai, Sr. Advocate with Mr. Shankh Sengupta, Mr. Sujoy Sur and Mr. Shreyash Sharma, Advocates
Cause Title: Akhilesh Kulshrestha V. M/s SAAB India Technologies Private Limited
Case No: Company Appeal (AT) (Insolvency) No. 353 of 2020
Coram: Justice Ashok Bhushan [Chairperson], Arun Baroka [Member (Technical)]
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