No Exception for the Executive, NCLT Declares Whole-Time Director’s Salary as Operational Debt

No Exception for the Executive, NCLT Declares Whole-Time Director’s Salary as Operational Debt

Introduction

The National Company Law Tribunal (NCLT), Chennai Bench, recently held that the unpaid salary dues of a whole-time director fall within the ambit of “operational debt” under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). The decision clarifies that directorial status does not, by itself, bar a director from invoking the IBC for recovery of unpaid remuneration when debt and default are duly established.

Factual Background

The application was filed by Mr. Arul Prasad Senniappan against Viprah Technologies Limited for recovery of unpaid salary amounting to ₹10.50 lakh. Senniappan had served as a Whole-Time Director from January 2016 to March 2017. The corporate debtor, while acknowledging the dues in its Minutes of Meeting dated December 15, 2018, failed to make the payment. This acknowledgment formed the foundation for the claim and extended the limitation period under the Limitation Act, 1963.

Procedural Background

The applicant initiated proceedings under Section 9 of the IBC, claiming the unpaid salary as operational debt. The corporate debtor opposed the plea, citing alleged misconduct, breach of fiduciary duties, and competition through another firm. The tribunal examined whether such defenses amounted to a “pre-existing dispute” sufficient to bar admission under the IBC.

Issues

1. Whether the unpaid salary of a whole-time director constitutes “operational debt” under Section 5(21) of the IBC.

2. Whether a director is barred from initiating insolvency proceedings under Section 9 of the IBC.

3. Whether the alleged misconduct and fiduciary breaches constituted a bona fide pre-existing dispute.

Contentions of the Parties

Applicant’s Contentions: The applicant argued that unpaid remuneration for services rendered as a whole-time director constitutes a legally enforceable debt. He relied on the corporate debtor’s acknowledgment in the minutes of meetings to extend the limitation period and maintained that no contemporaneous action or communication indicated any dispute regarding his dues.

Respondent’s Contentions: The corporate debtor contended that the applicant’s conduct and fiduciary breaches disentitled him from seeking relief under the IBC. It argued that the relationship was fiduciary rather than contractual, and therefore, claims of this nature should not be treated as operational debts.

Reasoning and Analysis

The bench comprising Judicial Member Jyoti Kumar Tripathi and Technical Member Ravichandran Ramasamy rejected the corporate debtor’s arguments. It held that the IBC does not bar a director from initiating proceedings under Section 9, provided that the debt is real, undisputed, and legally enforceable. The tribunal emphasized that fiduciary obligations under Section 166(4) of the Companies Act, 2013, cannot override the statutory remedies available under the IBC. It further held that allegations of misconduct, absent any formal proceedings or repudiation of dues prior to the demand, do not amount to a pre-existing dispute. The acknowledgment in the corporate debtor’s meeting minutes was deemed sufficient to establish the debt and extend limitation. The tribunal clarified that even “informal written communication” may constitute valid acknowledgment under law.

Implications

This decision reinforces the inclusive scope of “operational debt” under the IBC, affirming that even directors can invoke insolvency proceedings for unpaid remuneration when their employment has effectively ceased. The decision strengthens the position of directors and senior executives who are often left without remedies when companies default on contractual payments. It also underscores that fiduciary duties cannot be used as a shield by defaulting companies to evade legitimate salary claims under the IBC framework.

In this case the appellant was represented by Mr. P.J. Sri Ganesh, Mr. P.J. Rishikesh and Mr. Agil Vatchalam, Advocates. Meanwhile the respondent was represented by Mr. Pawan Jhabakh, Mr. Manivannan J and Mr. Antony R Julian, Advocates.