Legal Question in Business Law in India

In case of a demerger three companies are involved (A) demerged company; (B) a resulting company and (C) beneficiary with whom the master agreement was entered. In this scenario as to Whether -

(i) a novation agreement or deed of novation would be better in the best interest of beneficiary i.e. (C) ?

(ii) in order to indemnify the beneficiary company (C) in case of a probable failure on the part of the (B) to oblige the terms and conditions, is it legally possible to add clause indemnifying the (C) company by (A) for making good any financial, reputational or operational losses?

(iii) Does novation agreement / deed attracts stamp duty. If yes, whether it is shared proportionately or should be borne by the (A) and (B) category parties?

(iv) In case of a Bank Guarantee executed by the banker of (A) should a fresh BG be taken from the banker (even if it the same banker) of a resulting company i.e. (B) category?


Asked on 9/05/15, 11:04 pm

2 Answers from Attorneys
Fca Prashant Chavan Expert Edge LLP

06.07.2015

Dear Sir / Madam,

(i) Yes, a novation agreement is recommended;

(ii), Yes, clause may be added in the novation agreement;

(iii). Yes, Stamp Duty is applicable and may be borne by both the parties;

(iv), Not necessary.

Regards,

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Answered on 9/06/15, 5:00 am
Vivek Mapara Vivek N. Mapara

Sir

Novation of a Contract, substitutes the earlier contract with the new contract. So obligations of the parties arising under the earlier agreement stands discharged and only the provisions of the new agreement will be taken in to consideration to fix liability upon the respective parties.

Now in this scenario it is important to see the Original Contract and Bank Guarantee, as to how it stands, and what are the obligations of the respective parties, and to what extend such demerger would effect the right of the beneficiary and whether Novation can be effective in the present case.

On hypothetical basis, i will answers your question as under : -

(i) In a given situation like present, ideally Novation of Contract is advisable. This help re-defining and confirming the obligations, right, and liabilities of the respective parties.

(ii) A Novation is much like a new contract, substituting the earlier contract. So all provisions in the agreement must be made, so as to fasten the liability on (A) in the event of (B) committing default. In absence of any such provisions in the new agreement, (A) cannot be made liable under the Novated Agreement.

(iii) I am not sure, from which state you are, so i cannot advise whether stamp duties will be applicable on such Novation of Contract. Stamp Duty and its rates differs from state to state.

(iv) Now, so far so BG is concerned, if such BG is attached or arising out of the contract novated, then it is important to make provision in the new agreement to continue such Bank Guarantee, otherwise upon novation the BG may become void.

Please note, unless actual agreement and arrangement between the parties is perused, all answers to your questions are merely hypothetical. This will not constitute an official legal advise and shall not be acted upon as such.

Should you have any questions, then please feel free to contact me.

Regards

Vivek N Mapara

vnmlaws.com

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Answered on 9/06/15, 10:30 am


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