The transferee company in an NCLT-approved merger becomes the successor in interest of the transferor company. It assumes the transferor’s assets and liabilities, and it steps into the transferor’s shoes in the pending proceedings. The successor liability is a statutory consequence of the scheme, and it is not limited to the liabilities that are disclosed in the scheme or the financial statements.
The Scope of the Liability
The successor liability includes the transferor’s contractual liabilities, tax liabilities, regulatory penalties, environmental liabilities, and product liabilities. The NCLT order may allocate the liabilities between the transferor and the transferee, but the allocation is binding only on the companies that are parties to the scheme; it does not bind the statutory authorities or the third-party creditors.
The Limits of the Defence
The transferee company cannot rely on the NCLT order as a blanket defence against the transferor’s pre-scheme liabilities. The Supreme Court has held that the NCLT’s approval of a scheme does not preclude the tax authorities from recovering the tax that is statutorily due. The scheme is binding on the companies, but it is not a tax clearance, and it does not extinguish the authorities’ statutory powers.
The Due Diligence and the Indemnity
The transferee company should conduct a comprehensive due diligence of the transferor’s liabilities, quantify the contingent liabilities, and negotiate an indemnity from the transferor’s shareholders where the liability is discovered after the effective date. The scheme should include a representation and warranty schedule, and the consideration should reflect the assumed liabilities.
A technically sound merger allocates the successor liability explicitly, and it does not assume that the NCLT order is a substitute for the due diligence.
Call to Action
Anuj Desai & Associates advises companies on successor liability in an NCLT merger—from the liability due diligence and the scheme allocation to the indemnity negotiation and the defence against a post-scheme claim. If you are acquiring a company with significant contingent liabilities, we can help you structure the risk allocation.
📧 office@anujdesaiassociates.com
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