The Universal Succession Principle
An NCLT-sanctioned scheme is not a contract; it is a statutory vesting. The scheme operates by operation of law, and the assets and liabilities of the transferor vest in the transferee by virtue of the NCLT’s order. The principle of universal succession means that the transferee steps into the transferor’s shoes for all purposes, and the transferor’s contracts and liabilities are transferred without the need for individual novation.
The Binding Effect on Dissenting Creditors
The NCLAT has held that a court-approved scheme binds all creditors, including dissenting creditors. A creditor who did not vote in favour of the scheme cannot later challenge the scheme on the ground that it was not a party to the proceeding. The creditor’s remedy is to challenge the scheme on the ground of fraud or illegality, not to ignore it.
The Limits: Third-Party Property and Consent
The scheme cannot transfer property that does not belong to the transferor. The NCLT has no jurisdiction to adjudicate on the title of a third party’s property, and a scheme that purports to vest third-party assets in the transferee is vulnerable to challenge. Similarly, a scheme cannot extinguish a third party’s right without the third party’s consent where the right is protected by a statute or a contract that requires consent.
The Contractual Negative Covenants
Even under an NCLT-approved scheme, explicit negative covenants prohibiting transfer in sensitive contracts—such as rent-controlled leases—must be handled with care. The Supreme Court has held that the scheme’s statutory vesting does not override a statutory prohibition on transfer. The transferee should review the transferor’s contracts for anti-assignment clauses before the scheme is sanctioned.
The Practical Consequence
The scheme documents should identify the third parties whose rights may be affected and should address how those rights will be preserved. A scheme that is silent on third-party rights may be challenged after it is implemented, and the transferee may be exposed to litigation that could have been avoided.
Call to Action: For scheme third-party rights analysis, universal succession review, or anti-assignment clause assessment, contact office@anujdesaiassociates.com or 9619456656. Website: https://anujdesaiassociates.com. LinkedIn: linkedin.com/in/ca-anuj-desai-122547230.