National Company Law Appellate Tribunal

National Company Law Appellate Tribunal, New Delhi: In an appeal challenging the order of Adjudicating Authority rejecting appellant’s Section 9 IBC application regarding the balance of his arrear salary, a 3-member bench comprising of Ashok Bhushan, J., Mr. Barun Mitra* (Technical Member) and Mr. Indevar Pandey (Technical Member), affirmed the Adjudicating Authority’s decision that “holding company and subsidiary company are to be considered as separate legal entities and merely because their management was the same, raising of claims by the Appellant against the Corporate Debtor was not tenable.” The NCLAT emphasised that the IBC should not be manipulated for debt recovery purposes and upheld the principle that insolvency proceedings should only be initiated in cases where no real dispute exists between the parties.

Factual Matrix

In the instant matter, the appellant was appointed as the General Manager in respondent company, M/s Collage Group Infrastructure (P) Ltd. (the Corporate Debtor) on 10-10-2014. The Corporate Debtor failed to release timely payments of salary to the appellant and did not pay the salary to the appellant after 2015. The appellant submitted his resignation on 26-01-2016 and sent an email to the Corporate Debtor regarding the balance of his arrear salary and requested the payment. The Corporate Debtor provided a final settlement statement admitting an outstanding amount of Rs. 9,28,972/- as the amount payable to the appellant. The Corporate Debtor made limited part payments of the outstanding dues, but when some cheques were dishonoured and further payments were not made, the appellant sent a Section 8 demand notice on 06-03-2019. The Corporate Debtor did not reply to the notice or make any payments, so the appellant filed a Section 9 IBC application on 30-04-2019 for default of debt amounting to Rs. 9,97,747/-. A settlement was subsequently reached between the appellant and the Corporate Debtor, which was brought on record before the Adjudicating Authority on 27-02-2020, and the Section 9 application was withdrawn with the liberty to revive the same in the event of a failure of settlement. Due to a breach in the terms of settlement by the Corporate Debtor, the matter was reopened before the Adjudicating Authority by the appellant. The Adjudicating Authority rejected the Section 9 application and held that the appellant was working with a separate company, MNT Infrastructure (P) Ltd., and not with the Corporate Debtor, and therefore, the Corporate Debtor was not liable to pay the dues claimed.

Moot Point

  1. Whether the Corporate Debtor owes dues to the appellant?

  2. Whether the relationship between the Corporate Debtor and MNT establishes liability for the dues claimed by the appellant?

Parties’ Contentions

The appellant contended that he was under direct employment of the Corporate Debtor not under MNT Infrastructure (P) Ltd. and there was no evidence to prove otherwise. The appellant argued that the Adjudicating Authority should have “pierced” the corporate veil to find out the real status of MNT Infrastructure (P) Ltd., that it was not actually a separate entity. On the other hand, the respondent argued that the appellant got transferred to MNT Infrastructure (P) Ltd. and thus there remained no privity of contract between the appellant and the Corporate Debtor, and all the dues should have been paid by MNT Infrastructure (P) Ltd. The Respondent relied on Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353, while stating that there was a pre-existing dispute between the parties, which existed prior to the date of the issue of the Section 8 demand notice and hence the application under Section 9 was not admissible.

NCLAT’s Observation

The NCLAT noted that the Adjudicating Authority thoroughly examined the nature of the services provided by the appellant and held that they were rendered to a separate company, MNT Infratech (P) Ltd., and not directly to the Corporate Debtor. The Adjudicating authority relied on Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613, and stated that holding companies and subsidiaries are separate legal entities, even if they share management. Therefore, the Adjudicating Authority held that the appellant’s claims against the Corporate Debtor were not tenable. The NCLAT held that the business of a subsidiary company cannot ordinarily be treated to be the business of the holding company which is in line with the arguments of the respondent and the respondent company is not liable for the acts of its subsidiary.

“A subsidiary being a distinct legal personality is also allowed to have decentralised management. Mere ownership, parental control, management of a subsidiary by the holding company therefore does not constitute sufficient and adequate ground to justify piercing the status of their relationship as has been urged by the Appellant in the present case.”

The NCLAT affirmed the Adjudicating Authority’s decision, stating that the reliance on Vodafone (Supra) was appropriate. The NCLAT reiterated the legal principle that subsidiary companies are separate legal entities, as recognized by the Indian Companies Act, 1956. Moreover, the NCLAT emphasised that lifting the corporate veil to hold the parent company liable requires specific evidence of fraud or breach of trust, which was not provided by the appellant.

“…wherever public interest necessitates lifting of the corporate veil in the interests of justice, there always has to be some specific proof and evidence of fraud, wilful breach of trust, or some sham at play leading to avoidance or limiting the liabilities of the subsidiary company. In such cases of inextricably inter-linked corporate entities, the Court can always exercise caution and choose to lift the corporate veil.”

Additionally, the NCLAT examined whether there was a pre-existing dispute between the parties, as per the test laid down in Mobilox Innovations (Supra) and found that the disputes were pre-existing, and the appellant’s claim was disputed by the Corporate Debtor before the issuance of the Section 8 demand notice. Thus, there was no undisputed debt, and the Corporate Debtor could not be subjected to the insolvency process under the IBC. The NCLAT warned against manipulating the IBC for debt recovery purposes, as it would defeat the code’s purpose of rehabilitating Corporate Debtors.

NCLAT’s Decision

The NCLAT upheld the Adjudicating Authority’s decision, emphasising that the initiation of insolvency proceedings under the IBC should be based on clear cases where no real dispute exists between the parties. The NCLAT while agreeing with the Adjudicating Authority’s decision held that while other remedies can be sought by the appellant in this case, the application under Section 9 is rightly dismissed and consequently dismissed the appeal. The NCLAT granted the appellant option to seek other remedies available under the law. No costs were awarded.

[Vishal Sethi v. Collage Group Infrastructure (P) Ltd., 2024 SCC OnLine NCLAT 396, order dated 20-03-2024]

*Judgment by Mr. Barun Mitra (Technical Member)

Advocates who appeared in this case :

Mr. Shashwat Parihar, Mr. Shashwat Anand, Mr. Dhruva Viz, Mr. Deepanshu Oadiwal, Ms. Shruti Goyal and Mr. Gunjan Rathore, Counsel for the Appellant

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