An NCLT-approved scheme is not a contract. It is a statutory arrangement that derives its force from the Tribunal’s sanction and the Companies Act, 2013. A bilateral contract, by contrast, derives its force from the agreement of the parties. Where the two conflict, the scheme prevails, because the scheme binds the company, its shareholders, its creditors, and the statutory authorities, and it operates by force of law.
The Statutory Vesting
The most significant practical difference between a scheme and a bilateral contract is the mechanism of transfer. A bilateral asset transfer requires a conveyance deed, a novation agreement for each contract, and the consent of each counterparty. A scheme, by contrast, effects a statutory vesting: the assets and liabilities of the transferor company vest in the transferee company by virtue of the NCLT order, without the need for a separate conveyance or novation.
The statutory vesting is the reason why a scheme is preferred for a complex restructuring. It avoids the operational disruption that a bilateral transfer would cause, and it binds the counterparties who have not consented to the transfer.
The Binding Effect
Section 230(6) provides that the scheme, once sanctioned, is binding on the company, its members, its creditors, the liquidator (where applicable), and the persons who are affected by the scheme. The binding effect is statutory, and it is not dependent on the consent of each affected person. A dissenting creditor or shareholder is bound by the scheme if the requisite majority in the class has approved it.
The Inconsistency
Where a bilateral contract contains a term that is inconsistent with the scheme, the scheme prevails to the extent of the inconsistency. The scheme is a statutory document, and it cannot be overridden by a private agreement. The parties to the contract may have a claim for damages for the breach, but they cannot enforce the inconsistent term against the scheme.
The Interpretation
The scheme is interpreted in accordance with its terms and the NCLT’s order. Where there is a doubt or a query about the interpretation of a clause, the NCLT may be approached for a clarification, and the Tribunal’s clarification is binding. A bilateral contract is interpreted in accordance with the ordinary principles of contract law, and a dispute is resolved by the court or the arbitral tribunal.
A technically sound scheme anticipates the interaction with the existing contracts. It includes a clause that provides for the transfer of the contracts, the novation where required, and the resolution of any inconsistency. A scheme that leaves these issues to the post-sanction stage invites disputes and delays.
Call to Action
Anuj Desai & Associates advises companies on the relationship between an NCLT-approved scheme and a bilateral contract—from the statutory vesting and the binding effect to the inconsistency and the interpretation. If your scheme interacts with existing contracts, we can help you draft the clauses that address the interaction.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
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