2025 (5) TMI 583 - AT - IBC

Entitlement to the emoluments and perks in capacity as a Director of the Respondent - relinquishment of the position of CFO - Contractual nature of dispute - Appellant contends that the documents of the Respondent which were filed by the Respondent before various statutory authorities indicate that the Appellant was receiving the salary in dual capacity as the Whole-Time Director and Chief Financial Officer - HELD THAT - The Appellant was appointed as Chief Financial Officer (CFO) w.e.f. 01.05.2014 by an employment contract dated 10.03.2014. Later on the Appellant was appointed as the Whole Time Director (WTD) of the Respondent by way of Board Resolution dated 28.09.2015 along with the Annual General Meeting (AGM) dated 29.09.2015. It is to be noted that the Appellant was appointed as WTD because he was working as the CFO. The employment of the Appellant was terminated as per Clause 8.1 of the employment contract between the two parties. All the dues which included three months notice or salary in lieu of the notice were paid to the Appellant. Once he ceases to be CFO it is inconceivable that he could have continued as a WTD. It is worth noticing that the Appellant was not appointed as a WTD and there is no material to show any separate remuneration was payable to the Appellant for the position as a WTD. Further from the materials on records it is noted that there are no documents which suggest that the Appellant was being paid in the exclusive capacity as a WTD - It is inclined to agree with the contention of the Respondent for the reasons that he was appointed as a CFO and designated as WTD for being along with CFO and we cannot rely on the declarations on MR-1 for payment of salary exclusively as a WTD. Furthermore Article 48 of Articles of Association of the Company provides that if Appellant had to be paid as a WTD it had to be approved by a resolution passed by the Board of Directors and there was no such resolution passed by the board. There is nothing on record to demonstrate that the board had approved payment of remuneration to the Appellant for his position as a director - it is required to agree with the contention of the Respondent that since Article 48 provides that the remuneration to a Director has to be approved by the board and no such board resolution was passed the Respondent is not liable to pay any amount to the Appellant. The Respondent was not a WTD exclusively but was CFO-cum-WTD. There was no obligation on the Respondent to pay the same emoluments to him which were admissible to him in his capacity as CFO. The Appellant has not been able to provide any additional documents for us to determine as to whether after relinquishment of the position of CFO the Appellant was entitled to the same emoluments and perks in his capacity as a Director of the Company - Also there are no documents on record which substantiate the claim of the Appellant that he was liable to be paid the same emoluments as a CFO for the short period till his appointment as a WTD was formally revoked as per the Act. There is a pre-existing dispute between the parties and this could not have been resolved by the NCLT under the Code. The law is very clear that as per Section 9(5)(ii)(d) of the Code on an existence of pre-existing dispute the Application is not maintainable. Conclusion - The Appellant was initially appointed as a CFO. Later on being a CFO he was designated as WTD. On his termination all terminal benefits were paid to him. The required formalities to remove him as a Director of the Company needed some approvals of the board as well as AGM which took time. During this interim period from 01.03.2019 till 20.05.2019 he was not working as CFO and therefore Appellants claim that he was working as a WTD is not based any material on record. Therefore his claim for same emoluments and perks in his capacity as a Director of the Company is devoid of any basis. The claim of the Respondent that he is liable to be paid as a Director of the Company cannot be accepted. The present dispute arises out of the employment contract and is contractual in nature and cannot be raised under the Code. Accordingly the Appeal is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal and the Hon'ble Supreme Court arising from the appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016 ("Code") include:

• Whether the Appellant, after relinquishing the position of Chief Financial Officer (CFO), was entitled to the same emoluments and perks in his capacity as a Whole-Time Director (WTD) of the Respondent company during the period from March 1, 2019 to May 20, 2019.
• Whether the remuneration claimed by the Appellant for the period post-termination of his CFO employment constituted an operational debt payable under the Code.
• Whether there existed a pre-existing dispute under Section 8(2) of the Code regarding the appointment, termination, and remuneration of the Appellant, which would preclude admission of the Section 9 application under Section 9(5)(ii)(d) of the Code.
• Whether the Appellant's removal as a Whole-Time Director was in compliance with the procedural requirements under the Companies Act, 2013, particularly Section 169.
• Whether the dispute raised by the Appellant was contractual in nature and subject to arbitration as per the employment contract clause, thereby rendering the insolvency proceedings under the Code not maintainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to Emoluments as Whole-Time Director Post Termination as CFO

Relevant legal framework and precedents: The appointment and remuneration of directors and key managerial personnel are governed by the Companies Act, 2013, including Sections 196, 197, and 169. The Articles of Association (AoA) of the company also regulate remuneration payable to directors. Under the Code, an operational debt is defined as a claim in respect of the provision of goods or services, including employment-related dues.

Court's interpretation and reasoning: The Appellant was initially appointed as CFO by an employment contract dated March 10, 2014, and subsequently designated as an Additional Director and then Whole-Time Director on September 29, 2015. The appointment as WTD was expressly linked to his employment as CFO, as per the Board resolution stating "being already in employment of the company shall be appointed as a whole-time Director."

Upon termination of employment as CFO effective March 1, 2019, with payment of all dues including salary in lieu of notice, the Appellant contended entitlement to remuneration as WTD till removal on May 20, 2019. However, the Tribunal found no material or document evidencing any separate remuneration payable or paid for the WTD role distinct from the CFO role. The statutory e-form MR-1 filed under the Companies Act, 2013, which disclosed remuneration, did not establish separate payment for the directorship but was a disclosure of total remuneration paid in the capacity of CFO-cum-WTD.

The Articles of Association required Board approval for payment of remuneration to directors (Article 48), which was absent. Article 49 further mandated remuneration be subject to the Act and AoA provisions. No Board resolution approving remuneration to the Appellant as WTD was produced.

Key evidence and findings: Termination letter dated March 1, 2019, paid all dues including three months' salary in lieu of notice. No bank statements or salary slips indicated double payment for CFO and WTD roles. The Appellant did not perform directorial duties during the interim period. The removal as WTD was effected by Board and General Meeting resolutions on May 20, 2019, complying with Companies Act procedures.

Application of law to facts: Since the WTD appointment was contingent upon employment as CFO, termination of employment ended the basis for the WTD role and remuneration. Absence of Board approval for director remuneration and lack of evidence of separate payment negated entitlement to emoluments as WTD post-termination. The statutory and contractual framework did not support the claim.

Treatment of competing arguments: The Appellant relied on statutory filings (MR-1), financial statements, and Articles of Association to claim entitlement. The Tribunal rejected these as either disclosure forms or conditional provisions requiring Board approval. The Respondent's contention that no separate remuneration policy existed for directors was accepted.

Conclusions: The Appellant was not entitled to receive the same emoluments as CFO during the period he was only a director post-termination. The remuneration claimed for that period was not due.

Issue 2: Whether the Claim Constituted Operational Debt Under the Code

Relevant legal framework and precedents: Section 5(21) of the Code defines operational debt. Section 9(5)(ii)(d) mandates rejection of an application if a pre-existing dispute exists. The Supreme Court in Mobilox Innovation Pvt. Ltd. v. Kirusa Software Pvt. Ltd. clarified the scope of "dispute" for rejecting insolvency applications.

Court's interpretation and reasoning: The Appellant's claim arose out of employment and directorship arrangements, which were disputed immediately upon termination. The Respondent raised a dispute within the prescribed time under Section 8(2) of the Code. The Delhi High Court dismissed the Appellant's writ petition as premature, indicating the dispute was ongoing. The Tribunal found the dispute to be genuine and pre-existing.

Key evidence and findings: Notices and correspondence exchanged between parties in March 2019, the writ petition filed and dismissed by the Delhi High Court, and the Respondent's denial of liability evidenced a bona fide dispute.

Application of law to facts: The existence of a bona fide dispute precluded admission of the Section 9 application under Section 9(5)(ii)(d). The dispute was not spurious or hypothetical but a genuine contractual disagreement.

Treatment of competing arguments: The Appellant argued entitlement to operational debt for unpaid dues. The Respondent countered that the claim was contractual and disputed. The Tribunal followed Supreme Court precedent to reject the application on the ground of pre-existing dispute.

Conclusions: The claim was not maintainable as an operational debt under the Code due to the pre-existing dispute.

Issue 3: Compliance with Companies Act Provisions Regarding Removal of Director

Relevant legal framework and precedents: Section 169 of the Companies Act, 2013, governs removal of directors. Section 202 relates to punishment for default. Articles of Association regulate remuneration and removal procedures.

Court's interpretation and reasoning: The Appellant contended non-compliance with Section 169 for removal as WTD, entitling him to compensation. The Tribunal found that the WTD appointment was dependent on the CFO employment, and removal as director was a separate process requiring Board and shareholder approval, which was duly followed on May 20, 2019.

Key evidence and findings: Board and Extraordinary General Meeting resolutions removing the Appellant as WTD, compliance with procedural requirements, and absence of allegations of fraud or breach of fiduciary duty.

Application of law to facts: Since the Appellant ceased to be an employee on March 1, 2019, and was removed as director in accordance with law, no compensation for loss of office was due.

Treatment of competing arguments: The Appellant's reliance on Sections 169 and 202 was rejected as the termination of employment and removal as director were distinct and lawfully executed.

Conclusions: The removal complied with the Companies Act, and no additional compensation was payable.

Issue 4: Nature of Dispute and Appropriateness of Forum

Relevant legal framework and precedents: The employment contract contained an arbitration clause for dispute resolution. The Code excludes disputes that are purely contractual and subject to arbitration.

Court's interpretation and reasoning: The dispute arose from the employment contract and remuneration claims. The Tribunal noted the arbitration clause and held that the National Company Law Tribunal and Appellate Tribunal were not the appropriate forums for adjudicating contractual disputes subject to arbitration.

Key evidence and findings: Clause 9 of the employment contract mandated binding arbitration in New Delhi. The Respondent invoked this clause.

Application of law to facts: The dispute being contractual and subject to arbitration was not maintainable under the Code.

Treatment of competing arguments: The Appellant sought to invoke insolvency proceedings, but the Tribunal deferred to the contractual dispute resolution mechanism.

Conclusions: The dispute was contractual and arbitrable; hence, insolvency proceedings were not maintainable.

3. SIGNIFICANT HOLDINGS

"We find that the Appellant was initially appointed as a CFO. Later on, being a CFO he was designated as WTD. On his termination, all terminal benefits were paid to him. The required formalities to remove him as a Director of the Company needed some approvals of the board as well as AGM which took time. During this interim period from 01.03.2019 till 20.05.2019, he was not working as CFO and therefore Appellants' claim that he was working as a WTD is not based any material on record. Therefore, his claim for same emoluments and perks in his capacity as a Director of the Company is devoid of any basis."

"Article 48 of Articles of Association of the Company provides that if Appellant had to be paid as a WTD, it had to be approved by a resolution passed by the Board of Directors and there was no such resolution passed by the board. There is nothing on record to demonstrate that the board had approved payment of remuneration to the Appellant for his position as a director."

"There is a pre-existing dispute between the parties and this could not have been resolved by the NCLT under the Code. The law is very clear that as per Section 9(5)(ii)(d) of the Code, on an existence of pre-existing dispute, the Application is not maintainable."

"The dispute raised by the Appellant is contractual in nature and is subject to the arbitration clause in the employment contract. Therefore, the Petition was not maintainable under the Code."

Core principles established include:

• Designation as Whole-Time Director contingent upon employment as CFO does not entitle separate remuneration absent Board approval.
• Remuneration disclosures under statutory filings do not establish entitlement to separate payments.
• Existence of a bona fide pre-existing dispute bars admission of insolvency applications under the Code.
• Disputes arising out of employment contracts with arbitration clauses are not maintainable under the Code.
• Proper procedural compliance under the Companies Act for removal of directors is essential and its absence may give rise to claims, but not where removal is duly effected.

Final determinations on each issue were that the Appellant was not entitled to additional emoluments as WTD post termination as CFO; the claim was not an operational debt under the Code due to pre-existing dispute; removal as director was compliant with the Companies Act; and the dispute was contractual and arbitrable, thus not maintainable under the Code. Accordingly, the Appeal was dismissed.