2026 (3) TMI 853 - AT - IBC

Novation and Consideration: failure to show valid novation or third party performance sustains operational creditor admission, with limited payment remedy.

Unenforceable unilateral group arrangements, letters lacking consideration, or isolated payments by a third party do not effect novation or discharge of ... Admission of application under section 9 - discharge/novation based on a letter and alleged transfer of liability - corporate insolvency resolution process - operational debt - pre-existing dispute - Effect of third party performance under Section 41 of the Indian Contract Act - novatio and substituted contract under Section 62 of the Indian Contract Act - seeking withdrawal of CIRP - unenforceable agreement for want of consideration - collusive transfer of liabilities. Whether payment or acceptance by a third party discharged the corporate debtor under Section 41 of the Contract Act - HELD THAT:- The court held that Section 41 applies only where there is actual performance of the original promise by a third person accepted by the promisee; a mere promise or partial payments by a third party does not discharge the promisor. The pleaded or alleged payments by MK Overseas Pvt. Ltd., and the disputed letter of no objection, did not amount to actual performance that would extinguish the corporate debtor's liability under Section 41. [Paras 11, 16] Section 41 does not operate to discharge the corporate debtor on the facts of this case Novatio and substituted contract under Section 62 of the Indian Contract Act - HELD THAT:- The court found no valid, enforceable substituted contract evidencing novation. The alleged letter of no objection was unilateral, lacked consideration and was not a binding contract with the corporate debtor and MK Overseas Pvt. Ltd.; therefore it could not operate as a valid novation to extinguish the original liability. [Paras 17, 18, 19] There was no novation under Section 62 and the corporate debtor remains liable Pre existing dispute and unilateral transfer of liability in insolvency proceedings - HELD THAT:- The court held that unilateral internal arrangements or inter se agreements between shareholders or group companies, not assented to by the operational creditor, do not create a pre existing dispute between the corporate debtor and the operational creditor. The adjudicating authority correctly rejected the plea of novation and found no pre existing dispute preventing admission of the Section 9 application. [Paras 21, 22, 25] The adjudicating authority rightly admitted the Section 9 application as there was debt and default by the corporate debtor Scope of adjudicating authority's observations concerning criminal liability - HELD THAT:- The court examined the impugned order and concluded that although the adjudicating authority had recorded observations suggesting potential criminality, the operative portion contained no direction to initiate such proceedings. The appellate court held those observations to be inappropriate and ordered their deletion. [Paras 23, 26] Observations about proceeding under criminal provisions are deleted Final Conclusion: The admission of the Section 9 petition was upheld; the appellate court held that neither third party payments nor the alleged unilateral letter effected discharge or novation of the corporate debtor's liability, deleted the adjudicating authority's observations about criminal proceedings, and granted the appellant an opportunity to pay the claimed amount within 30 days to permit the operational creditor to seek withdrawal under Section 12A. Issues: (i) Whether the adjudicating authority was justified in admitting the Section 9 application against the corporate debtor notwithstanding the plea of discharge/novation based on a letter dated 30.06.2018 and alleged transfer of liability to MK Overseas Pvt. Ltd.; (ii) Whether observations in the adjudicating authority's order suggesting initiation of criminal proceedings against the corporate debtor and MK Overseas Pvt. Ltd. should be sustained; (iii) Whether the appellant should be granted an opportunity to make payment and the procedural consequence of such payment under Section 12A and applicable CIRP regulations.Issue (i): Whether the Section 9 admission was unsustainable because the operational creditor had accepted payment or had novated the debt to MK Overseas Pvt. Ltd., invoking principles under the Indian Contract Act, 1872.Analysis: The admitted facts show supplies were made to and accepted by the corporate debtor and part payments were made; the corporate debtor pleaded transfer of liability based on a Share Purchase Agreement and a letter dated 30.06.2018 which was not part of any tripartite agreement and did not involve the operational creditor as a contracting party to a novation. The letter, even if treated as an agreement, contained no consideration and was susceptible to challenge under the doctrine of consideration. Section 41 requires actual performance by a third party accepted by the promisee to discharge the promisor; the record does not establish such full performance by MK Overseas Pvt. Ltd. Section 62 requires a valid substituted contract between the parties to effect novation; no enforceable substituted contract involving the operational creditor and MK Overseas Pvt. Ltd. is established. Relevant precedents were applied to confirm that unilateral or internal group arrangements and unilaterally written letters not supported by consideration do not constitute a novation or discharge that can defeat an operational creditor's claim under Section 9.Conclusion: The plea of discharge by acceptance of performance from a third party and the plea of novation are rejected; the adjudicating authority correctly admitted the Section 9 application and there existed debt and default by the corporate debtor (conclusion adverse to appellant).Issue (ii): Whether the adjudicating authority's observation that the directors of the corporate debtor and MK Overseas Pvt. Ltd. are liable to be proceeded against under appropriate criminal provisions should be maintained.Analysis: The impugned order contained an observation suggesting possible criminal liability, but the operative portion of the adjudicating authority's order contained no directions to initiate criminal proceedings or to forward the record to regulatory/criminal authorities. The appellate determination assesses whether such observational language can stand as a direction; absent any specific operative direction, maintaining such a statement would be inappropriate.Conclusion: The observational finding regarding liability to be proceeded against under criminal provisions is deleted (conclusion in favour of appellant on this limited point).Issue (iii): Whether an opportunity should be granted to the appellant to make payment and the procedural steps following payment, including the filing and disposal of a Section 12A application under the CIRP Regulations, 2016.Analysis: Considering the scale of the corporate debtor's business and the admitted existence of debt, equitable relief in the form of a time-bound opportunity to make the claimed payment was considered appropriate. The appellate order provides a 30-day opportunity to pay the amount claimed in Part IV; on payment, the operational creditor may file a Section 12A application for withdrawal of CIRP which the adjudicating authority must decide in accordance with law and Regulation 30A of the CIRP Regulations, 2016. Interim protection granted in the appeal is continued until disposal of the Section 12A application.Conclusion: Appellant is granted 30 days to pay the amount claimed; on receipt, the operational creditor may file a Section 12A application which the adjudicating authority shall decide expeditiously (conclusion providing procedural relief to appellant but affirming admission).Final Conclusion: The adjudicating authority's admission of the Section 9 application is upheld; the plea of novation or discharge by third-party performance is rejected, an improvident criminal-observational remark is expunged, and a limited, time-bound opportunity to make the claimed payment with consequent Section 12A remedy is granted.Ratio Decidendi: A unilateral or internal transfer of liability, an unenforceable letter lacking consideration, or isolated payments by a third party do not legally novate or discharge a corporate debtor's obligation to an operational creditor; where debt and default are established, admission under Section 9 of the Insolvency and Bankruptcy Code, 2016 is appropriate, subject to lawful procedural remedies including payment followed by a Section 12A application for withdrawal of CIRP.