An NCLT scheme transfers the transferor company’s liabilities to the transferee company, including the liabilities that are the subject of pending litigation. The NCLT order typically provides that all pending legal proceedings shall be continued by or against the transferee company. But the transfer of the liability does not extinguish the cause of action, and the transferee company steps into the shoes of the transferor company as the successor in interest.
The Statutory Basis
Section 232(3)(i) provides that the transferor company’s liabilities shall become the liabilities of the transferee company. The NCLT’s order in the Air India-Vistara merger provided that all contracts and ongoing legal proceedings of the transferor companies shall be transferred to and continued by or against the transferee company without interruption. The order also clarified that the sanction did not exempt the companies from the payment of statutory dues, taxes, or other obligations.
The Successor Liability
The transferee company is liable for the transferor company’s pre-scheme liabilities, including tax demands, regulatory penalties, and contractual claims. The Supreme Court’s decision in Reliance Jio Infocomm confirms that the NCLT’s approval of a scheme does not preclude the Income-tax Department from taking proceedings for the recovery of tax statutorily due. The scheme is binding on the companies, but it is not binding on the tax authorities in the exercise of their statutory functions.
The Practical Steps
The transferee company should conduct a litigation and liability due diligence before the effective date, quantify the contingent liabilities, and provide for them in the scheme’s consideration. The scheme should include a clause that the transferee company assumes the transferor company’s liabilities, and the tax and regulatory authorities should be notified of the transfer.
A technically sound scheme addresses the pending litigation and the successor liability as part of the overall risk allocation, and it does not assume that the NCLT order extinguishes the transferor company’s liabilities.
Call to Action
Anuj Desai & Associates advises companies on the litigation and liability aspects of an NCLT scheme—from the due diligence and the contingent liability quantification to the scheme clauses and the successor liability defence. If your scheme involves significant pending litigation, we can help you assess the exposure.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
🔗 linkedin.com/in/ca-anuj-desai-122547230
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