The Contrast with Slump Sale
In a business transfer agreement or a slump sale, the transfer of contractual liabilities requires novation under Section 62 of the Indian Contract Act. Novation extinguishes the original contract and substitutes a new one, and it requires the counterparty’s consent. An NCLT-sanctioned scheme is different: the transfer occurs by operation of law, and the transferee steps into the transferor’s contractual position without the counterparty’s consent.
The Arbitration Clause
The Calcutta High Court has held that a successor to a merger transaction can invoke an arbitration clause when all rights and liabilities are transferred under the scheme. The transferee is not a stranger to the arbitration agreement; it claims “through” or “under” the original signatory, and the arbitration clause travels with the contract.
The Anti-Assignment Clause
The operation-of-law principle does not override an express anti-assignment clause in a contract. If the contract prohibits assignment without the counterparty’s consent, the scheme’s statutory vesting may not be effective to transfer the contract. The transferee should review the transferor’s key contracts for anti-assignment clauses and obtain the counterparty’s consent where required.
The Practical Documentation
The scheme should include a clause that transfers all contracts, rights, and liabilities of the transferor to the transferee. The transferee should notify the counterparties of the transfer and provide the NCLT order as evidence. The counterparties cannot refuse to perform on the ground that they were not parties to the NCLT proceeding, unless the contract contains a valid anti-assignment clause.
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