Corporate Debtor Cannot Escape Liability By Claiming Debt Was Transferred To Another Company: NCLAT
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi has upheld the admission of insolvency proceedings against Al-Dua Food Processing Pvt. Ltd., rejecting the contention that the operational debt had been transferred to another company under a share purchase arrangement. The Bench comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) held that the defence of transfer of liability was not established and that the corporate debtor could not escape its obligation to pay the operational creditor.
The appeal was filed by Mohd. Zaheer, a suspended director of the corporate debtor, challenging the order of the National Company Law Tribunal, New Delhi Bench, which had admitted an application under Section 9 of the Insolvency and Bankruptcy Code filed by operational creditor Ashu Agencies for recovery of ₹2.48 crore.
The dispute arose from the supply of kraft paper reels to Al-Dua Food Processing Pvt. Ltd. during the financial years 2017–18 and 2018–19 pursuant to purchase orders issued by the company. The materials were supplied and received by the corporate debtor, and although part payments were made, a substantial amount remained outstanding. Consequently, the operational creditor issued a demand notice on 25 July 2019 claiming dues of ₹2,48,46,299.76, after which an insolvency application was filed before the NCLT.
In response, the corporate debtor contended that its management had changed in July 2018 and that liabilities owed to certain creditors, including the operational creditor, had been transferred to M.K. Overseas Pvt. Ltd. pursuant to a share purchase arrangement. It relied on a letter dated 30 June 2018 allegedly issued by the operational creditor stating that it had no objection if the outstanding balance was transferred to M.K. Overseas Pvt. Ltd.
Before the appellate tribunal, the appellant argued that the operational creditor had accepted payments from M.K. Overseas Pvt. Ltd., including ₹35 lakh through banking channels and ₹85,000 in cash, which demonstrated that the creditor had agreed to receive payment from the third party. On this basis, it was contended that the corporate debtor stood discharged under Section 41 of the Contract Act, 1872, which deals with acceptance of performance from a third party.
The appellant further argued that the original arrangement had been replaced by a new contractual arrangement and that the liability had been novated in terms of Section 62 of the Contract Act. Accordingly, it was submitted that the insolvency proceedings against Al-Dua Food Processing Pvt. Ltd. were not maintainable.
The operational creditor disputed these claims and maintained that the supplies had been made directly to the corporate debtor under its purchase orders and were received and utilized by it. It contended that it was not a party to the share purchase agreement between Al-Dua Food Processing Pvt. Ltd. and M.K. Overseas Pvt. Ltd., and therefore any internal arrangement between the two companies could not shift the liability owed to the creditor.
After examining the material on record, the Appellate Tribunal noted that the supplies were undisputed and that the corporate debtor had itself admitted that an amount of approximately ₹2.47 crore was due to the operational creditor. The Tribunal observed that the corporate debtor’s defence was based primarily on the alleged no-objection letter dated 30 June 2018 and the internal arrangement with M.K. Overseas Pvt. Ltd.
The Tribunal held that the reliance placed on Section 41 of the Contract Act was misplaced. It observed that the provision applies only where the original contractual obligation has actually been performed by a third party and such performance has been accepted by the promisee in satisfaction of the debt. In the present case, there was no evidence that the entire debt had been discharged by the third party.
The Bench also rejected the plea of novation under Section 62 of the Contract Act. It noted that novation requires a valid and enforceable substituted contract involving the consent of all parties concerned. In the present case, no tripartite agreement had been produced to show that the operational creditor had agreed to substitute M.K. Overseas Pvt. Ltd. in place of the corporate debtor.
Further, the Tribunal observed that the alleged letter dated 30 June 2018 could not extinguish the liability of the corporate debtor. Even if the letter was assumed to exist, it did not refer to any consideration and therefore could not constitute a legally enforceable agreement. An agreement without consideration would be void under Section 25 of the Contract Act.
The Tribunal also reiterated the settled principle that a borrower cannot unilaterally transfer its liability to a third party without the consent of the creditor. It noted that while a creditor may assign its debt to another entity, the debtor cannot transfer its obligation to a third party through an internal arrangement.
The Bench further observed that receiving some payments from a third party does not automatically discharge the original debtor unless the creditor has expressly agreed to substitute the third party in its place. In the present case, no such agreement or arrangement involving the operational creditor was produced.
Accordingly, the Tribunal concluded that the corporate debtor was not entitled to the benefit of Section 41 of the Contract Act and that the contract under which the corporate debtor had incurred liability to the operational creditor could not be said to have been novated under Section 62. The Tribunal observed that “there being debt and default committed by the corporate debtor, adjudicating authority has rightly admitted Section 9 application.”
While upholding the admission of the insolvency proceedings, the Tribunal deleted certain observations made by the NCLT regarding possible criminal proceedings against the directors of the corporate debtor and M.K. Overseas Pvt. Ltd. Taking note of the submission that the company was a running concern with significant turnover and employment, the Tribunal granted the appellant an opportunity to pay the outstanding amount of ₹2,48,46,299.76 to the operational creditor within 30 days. It directed that upon such payment, the operational creditor may file an application under Section 12A of the Insolvency and Bankruptcy Code seeking withdrawal of the CIRP in accordance with law.
Cause Title: Mohd. Zaheer Vs Ashu Agencies & Anr
Case Number: Company Appeal (AT) (Insolvency) 1526/2025
Coram: Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member)
