Vishal Sethi vs Collage Group India Pvt. Ltd

[Arising out of order dated 02.03.2023 passed by the Adjudicating Authority, National Company Law Tribunal, New Delhi Bench Court-III in CP.IB-1108/ND/2019]

IN THE MATTER OF:

Vishal Sethi Address- RZ-33, 1st Floor, Gali No. 2, Subash Park Extension-2, Uttam Nagar, New Delhi-110059 ...Appellant

Versus

M/s Collage Group Infrastructure Pvt. Ltd.

Through its Directors

Address-Somdatt Builders House, 56-58,

Community Centre, East of Kailash,

New Delhi-110065 ...Respondent

Present:

Appellant: Mr. Shashwat Parihar, Mr. Shashwat Anand, Mr. Dhruva Viz, Mr. Deepanshu Oadiwal, Ms. Shruti Goyal and Mr. Gunjan Rathore, Advocates.

For Respondents: Appearance not marked. 2

JUDGMENT

[Per: Barun Mitra, Member (Technical)]

The present appeal filed under Section 61 of Insolvency and Bankruptcy

Code 2016 ('IBC' in short) by the Appellant arises out of the Order dated

02.03.2023 (hereinafter referred to as 'Impugned Order') passed by the

Adjudicating Authority (National Company Law Tribunal, New Delhi Bench,

Court-III) in CP(IB) No.1108/ND/2019. By the Impugned Order, the

Adjudicating Authority has dismissed the Section 9 petition filed by the

Appellant seeking to bring the Corporate Debtor under the rigours of

Corporate Insolvency Resolution Proceedings ('CIRP' in short). Aggrieved by

this impugned order, the present appeal has been preferred.

2. Making his submissions, the Learned Counsel for the Appellant stated

that the Appellant/Operational Creditor was appointed as General Manager

in the Corporate Debtor company-M/s Collage Group Infrastructure Private

Limited ('Collage' in short) on 10.10.2014. The Corporate Debtor also issued

a confirmation of appointment letter which shows that the Appellant was an

employee of the Corporate Debtor. In due course of time, the Corporate Debtor

failed to release timely payments of salary and eventually salary payments

came to a halt from 2015 onwards. The Appellant submitted his resignation

on 26.01.2016 on the behest of the Corporate Debtor and sent an email to the

Corporate Debtor on the same date indicating balance of his arrear salary and

requested the Corporate Debtor to pay the same as soon as possible. Following

this email, a full and final settlement statement was provided by the Corporate

Debtor admitting an outstanding amount of Rs. 9,28,972/- as debt due and

Company Appeal (AT) (Insolvency) No. 903 of 2023 3

payable. It was therefore contended that the Appellant remained an employee

of the Corporate Debtor all through until his resignation and hence the

Corporate Debtor was liable to clear the operational dues.

3. It was submitted that the Corporate Debtor also made limited part

payments of the outstanding dues, but when some cheques issued by the

Corporate Debtor were dishonoured and further payments were not

forthcoming, the Appellant sent a Section 8 demand notice on 06.03.2019.

However, neither any reply was received nor any payments received, and

therefore a Section 9 IBC application was filed on 30.04.2019 for default of

debt amounting Rs.9,97,747/- only.

4. Advancing their case further, it was pointed out that subsequently a

settlement was arrived at between the Appellant and 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 failure of settlement between the parties. Owing to breach caused

in the terms of settlement by the Corporate Debtor, the matter was reopened

before the Adjudicating Authority, by the Appellant. However, the

Adjudicating Authority wrongly rejected the Section 9 application by wrongly

holding that the Appellant was working with a separate company, namely,

MNT Infrastructure Private Limited ('MNT' in short) and not with the

Corporate Debtor and hence the Corporate Debtor was not liable to pay the

dues claimed.

5. Assailing the impugned order, it has been contended that Clause 2 of

the letter of appointment clearly shows that the Appellant was under the

Company Appeal (AT) (Insolvency) No. 903 of 2023 4

employment of the Corporate Debtor and not of any separate entity. It was

strenuously contended that there is no document to show any

appointment/transfer letter of the Appellant to MNT. No documentary

evidence has been brought on record by the Corporate Debtor to support the

contention that the Appellant was not an employee of the Corporate Debtor.

6. Further keeping in view that the Corporate Debtor had given a full and

final settlement statement and thereby agreeing to clear the entire

outstanding debt due to the Appellant, it was clear from this wilful admittance

of debt that the Appellant was working with the Corporate Debtor and not

with any separate entity. While admitting that the settlement agreement was

signed by one of the representatives of MNT, it was clarified that the latter

was governed and operated by the same staff/management of the Corporate

Debtor and that there existed 100% shareholding between the two entities. It

was further submitted by the Appellant that the Adjudicating Authority

should have considered all relevant facts and evidence and pierced the

corporate veil to find out the real status of MNT that it was not actually a

separate entity.

7. The Learned Counsel for the Respondent refuting the submissions

made by the Appellant submitted that the period for which the Appellant

worked with the Corporate Debtor, that is, from October 2014 to March 2015,

he got paid his monthly salary regularly by the Corporate Debtor.

Subsequently, when the Appellant got transferred to MNT, there remained no

privity of contract between the Appellant and the Corporate Debtor.

Company Appeal (AT) (Insolvency) No. 903 of 2023 5

8. Consequent upon his transfer to MNT, all his dues thereafter could have

been raised only against MNT. This is also borne out by the fact that the full

and final statement of settlement that was signed by the Appellant was with

MNT and the Corporate Debtor is not a signatory therein. Even the part

payments made from time to time towards the full and final settlement were

made by MNT and not by the Corporate Debtor as is borne out from the bank

account details of the Appellant. Appellant has incorrectly claimed to be an

employee of the Corporate Debtor at the time of his resignation.

9. It was further contended that when the Appellant sent a legal notice on

11.04.2017, it was clearly stated by the Corporate Debtor in their reply on

10.05.2017 that the Corporate Debtor did not owe any money to the

Appellant. When the Appellant yet again sent another legal notice on

25.04.2018, the Corporate Debtor again reiterated that they did not owe any

money to the Appellant. The legal notices and the replies thereto clearly show

that there was a dispute existing between the Appellant and the Corporate

Debtor and this dispute had its roots prior to the date of the issue of Section

8 demand notice. The Learned Counsel for the Corporate Debtor has relied on

the Mobilox judgement of the Hon'ble Apex Court that since there was a pre-

existing dispute, the Section 9 application cannot be admitted.

10. We have duly considered the arguments advanced by the Learned

Counsels for both parties and perused the records carefully.

11. It is the case of the Appellant that the contractual relationship between

the Corporate Debtor and the Appellant as that of an employer and employee

continued from the date of appointment till the resignation of the Appellant

Company Appeal (AT) (Insolvency) No. 903 of 2023 6

from the management of Corporate Debtor. The Appellant was an employee of

the Corporate Debtor for the period for which dues have been claimed by the

Appellant. MNT was therefore never in the picture insofar as the employment

of the Appellant was concerned. It has also been further contended that the

Corporate Debtor is evading its liability to clear the outstanding operational

debt under the guise of the Corporate Debtor having a distinct and separate

legal identity from MNT, when both of them are controlled by the same

management and hence the liability to clear dues cannot shift on this flimsy

ground.

12. It has been the counter submission of the Respondent that the

settlement deed to which the Appellant has adverted attention to had been

correctly noticed by the Adjudicating Authority to have been signed between

the Appellant and MNT and not with the Corporate Debtor. The Corporate

Debtor was not obligated to honour the terms of a settlement deed which was

signed between the Appellant and some entity other than the Corporate

Debtor. Emphatically asserting that the doctrine of privity of contract is a

settled principle of law under which a third party cannot be made liable under

contract unless he is a party to the said contract and applying this principle,

the Corporate Debtor was not liable in any manner to discharge the liability

of a different legal entity. It was therefore contended that the Adjudicating

Authority in the impugned order reached the correct finding that there exists

no rightful claim of the Appellant against the Corporate Debtor as he was not

an employee of the Corporate Debtor.

Company Appeal (AT) (Insolvency) No. 903 of 2023 7

13. When we have a look at the impugned order, we notice the Adjudicating

Authority has analysed in details the tenability of the contention of the

Corporate Debtor that the Appellant was not its employee and therefore no

dues were payable by the Corporate Debtor to the Appellant. The Adjudicating

Authority in the impugned order after noticing the full and final settlement

document has observed that the same was executed between the Appellant

and MNT and not between the Appellant and the Corporate Debtor. The

Adjudicating Authority has thereafter concluded while passing the impugned

order that the settlement agreement clearly shows that the Appellant rendered

services to MNT which was a separate company from the Corporate Debtor.

The Adjudicating Authority has further gone a step ahead to examine whether

in such circumstances the Corporate Debtor can be said to owe any liability

to the Appellant in the backdrop of their contention that the Corporate Debtor

and the MNT shared the same the management.

14. The Adjudicating Authority after referring to the decision of the Hon'ble

Supreme Court in the matter of Vodafone International Holdings BV vs

Union of India and Anr. (2012) 6 SCC 613 ('Vodafone' in short) has relied

thereon to hold that the 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 relevant excerpt of the impugned order is as reproduced

below:

"7. .......... It is advantageous at this juncture refer the decision of Hon'ble Supreme Court in the matter of Vodafone International

Company Appeal (AT) (Insolvency) No. 903 of 2023 8

Holdings v. Union of India & Anr. (Civil Appeal No. 733 of 2012). The relevant para of the decision is reproduced below:-

'(PARA-56) Companies Act in India and all over the would have statutorily recognised subsidiary company as a separate legal entity.

(PARA-59) Holding company and subsidiary company are, however, considered as separate legal entities, and subsidiary are allowed decentralized management. Each subsidiary can reform its own management personnel and holding company may also provide expert, efficient and competent services for the benefit of the subsidiaries.

(PARA-75) Further, as stated above, a company is a separate legal persona, and the fact that all the shares are owned by one person or a company has nothing to do with the existence of a separate company. Therefore, though it may be advantageous for a parent and subsidiary companies to work as a group, each subsidiary has to protect its own separate commercial interests.'

8. In the light of the decision referred to supra, the Hon'ble Supreme Court held that the legal relationship between a holding company and its subsidiary is that they are two distinct legal persons, and the holding company does not own the assets/liabilities of the subsidiary. It is clear from the perusal from the Full & Final Settlement Agreement executed between the parties that, applicant rendered his services to M/s MNT Infratech Private Limited working under the same management.

Therefore, it appears to us that the services of the Operational Creditor was placed with M/s MNT Infratech Private Limited, with is a separate Company and Operational Creditor continued his services with the side Company.

9. Taking into consideration all the aforesaid facts, we are of the view that, the Operational Creditor has failed to prove existence 'Operational Debt' which is payable by the Corporate Debtor. Thus, we have no hesitation to hold that, the claims raised by the Operational Creditor against the Corporate Debtor

Company Appeal (AT) (Insolvency) No. 903 of 2023 9

i.e. M/s Collage Group India Private Limited are neither tenable in the eyes of law nor on facts."

15. We are of the considered opinion that the reliance placed upon the

Vodafone judgment supra by the Adjudicating Authority in the present facts

of the case does not suffer from any infirmity and is very much in order. In

this judgement the Hon'ble Supreme Court has carved out the basic legal

principle with regard to relationship between subsidiary company and holding

company by holding that the legal relationship between a holding company

and its subsidiary is that they are two distinct legal persons and the holding

company does not own the assets of the subsidiary. The business of a

subsidiary cannot therefore ordinarily be treated to be the business of the

holding company.

16. The Indian Companies Act, 1956 has also statutorily recognised

subsidiary companies as a separate legal entity. A subsidiary is a separate

legal entity for tax and liability purposes. 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. Further, 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.

Company Appeal (AT) (Insolvency) No. 903 of 2023 10

However, to hold the parent company liable, there is need of specific and

detailed information, but no such credible information has been provided by

the Appellant. In the present case, there are no sustainable grounds placed

on record for holding the Corporate Debtor company liable for the acts of its

subsidiary and hence we affirm the findings recorded by the Adjudicating

Authority in the impugned order.

17. At this stage we may also analyse as to whether payment to the

Operational Creditor was due from the Corporate Debtor and if so, whether

any default was committed by the Corporate Debtor in respect of payment of

such operational debt and whether there was any pre-existing dispute prior

to the issue of Section 8 Notice. This examination would be in line with the

test which has been laid down by the Hon'ble Supreme Court in Mobilox

Innovations Pvt. Ltd. Vs. Kirusa Software Private Limited (2018) in C.A.

No.9405 of 2017 (hereinafter referred to as 'Mobilox'). It is relevant to refer

to para 56 of Mobilox supra which is extracted as hereunder: -

"56. Going by the aforesaid test of "existence of a dispute", it is clear that without going into the merits of the dispute, the appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability."

18. It is the case of the Respondent that the Appellant had sent a legal

notice on 11.04.2017 as placed at page 40 of Reply Affidavit of the

Company Appeal (AT) (Insolvency) No. 903 of 2023 11

Respondent. The legal notice was duly replied to by the Corporate Debtor on

10.05.2017 as placed at page 44 of Reply Affidavit of the Respondent. We

notice that in their reply, the amount claimed as operational debt has been

unequivocally disputed by the Corporate Debtor and no liability has been

admitted on this count. In the said reply, the Corporate Debtor has also stated

that the Appellant was working for some other organisation and hence denied

their claim. From the tone and tenor of the said reply, we have no hesitation

in recording our view that ingredients of dispute between the two parties are

distinctly etched out. More significantly, this reply to the legal notice clearly

predates the Section 8 Demand Notice of 06.03.2019. It can thus be safely

concluded that the disputes between them were pre-existing in nature.

Further, the defence cannot be held to be spurious, bluster, frivolous or

vexatious. The present is therefore not a case where there is an undisputed

debt for which Corporate Debtor can be brought under the rigors of CIRP.

Therefore, we are of the considered view that in the attendant circumstances,

the ratio of the judgement of the Hon'ble Supreme Court in the case of

Mobilox squarely applies to the facts of this case. When any Operational

Creditor seeks to initiate insolvency process against a Corporate Debtor, it

can only be done in clear cases where no real dispute exists between the two

which is not so borne out from the present factual matrix. We are also

constrained to point out that the provisions of IBC cannot be manipulated

and the process of law allowed to be misused such as to turn IBC into a debt

recovery proceeding as it would frustrate the basic intent and objective of this

special code to bring the Corporate Debtor back on its feet.

Company Appeal (AT) (Insolvency) No. 903 of 2023 12

19. In view of the foregoing discussion, we are satisfied that the

Adjudicating Authority did not commit any error in rejecting the Section 9

application. We find no reasons to disagree with the findings of the

Adjudicating Authority. There is no merit in the Appeal. Appeal is dismissed.

We however make it clear that it will remain open to the Appellant to resort to

other remedies that may be available to it under any other law. No order as to

costs.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical)

[Indevar Pandey] Member (Technical)

Place: New Delhi Date: 20.03.2024 Ram N.

Company Appeal (AT) (Insolvency) No. 903 of 2023