NCLAT Upholds Insolvency Against Al-Dua, Rejects Plea That Debt Was Transferred To Another Company

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently upheld the admission of insolvency proceedings against Al-Dua Food Processing Pvt. Ltd., rejecting the plea of its ex-promoter Mohd. Zaheer that the company was not liable to pay the operational debt as the liability had been transferred to another entity under a Share Purchase Agreement.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra held that the defence of transfer of liability was not established, observing, “The corporate debtor is neither entitled to benefit of the Section 41 of the Contract Act, 1872 nor the contract under which the corporate debtor has liability to pay for outstanding dues of the operational creditor can be said to have been novated within meaning of Section 62 of the Contract Act, 1872. We, thus are of the view that there being debt and default committed by the corporate debtor, adjudicating authority has rightly admitted Section 9 application.”

The tribunal upheld the order of the National Company Law Tribunal, New Delhi Bench, which had admitted insolvency proceedings against Al-Dua Food Processing Pvt. Ltd. on a petition filed by its operational creditor for recovery of about Rs 2.48 crore.

The dispute arose from supply of kraft paper reels to the company during the financial years 2017-18 and 2018-19 under purchase orders issued by it. Part payments were made, but a substantial amount remained unpaid. A demand notice was issued on July 25, 2019, after which the creditor filed an insolvency petition in August 2019.

The company replied that its liability had been shifted to M.K. Overseas Pvt. Ltd. under a share purchase agreement executed in July 2018, and relied on a letter said to have been issued by the creditor stating that it had no objection to transfer of the outstanding balance to that company.

Before the appellate tribunal, Zaheer argued that the creditor had accepted payments from M.K. Overseas Pvt. Ltd., and therefore the original debtor stood discharged under the Contract Act. He maintained that the earlier arrangement had been replaced by a new one after the share purchase agreement, and on that basis insolvency proceedings against Al-Dua could not continue.

The creditor disputed this, pointing out that the supplies were made to Al-Dua itself and the liability arose from those transactions. It said it was never a party to any agreement between Al-Dua and M.K. Overseas, and any understanding between the two companies could not shift the debt or defeat the creditor's claim.

The tribunal accepted this position. It noted that the goods had been supplied to the corporate debtor under its purchase orders and were received and used by it. In such circumstances, the Bench said, the liability could not be avoided merely by referring to an internal arrangement with another entity. It also held that receiving some payments from a third party does not, by itself, discharge the original debtor unless the creditor has agreed to substitute the new party in its place.

The Bench further observed that no tripartite agreement had been produced to show that the creditor had consented to any transfer of liability. The letter relied upon by the appellant was also found insufficient, the tribunal noting that an agreement without consideration has no legal effect and therefore could not extinguish the debt.

Holding that the debt and default were proved, the tribunal said the insolvency petition had been rightly admitted.

However, taking note of the submission that the company was a running concern, the tribunal granted it 30 days to pay the amount due to the creditor, observing that if the payment is made, the insolvency proceedings may be withdrawn in accordance with law.