A business owes money and wants to hand over goods instead. A supplier is owed cash and is asked to take stock in place of it. The question is whether Indian law allows a monetary debt to be discharged by supplying goods, and, just as important, whether a creditor can be made to accept goods when what was owed was money. The short answer is that the substitution is valid, but only on the creditor's terms. The debtor cannot force it. This explainer sets out the contract-law basis for goods-in-lieu-of-cash settlement, the conditions that make such a settlement binding, and the tax and sale-of-goods consequences that follow once the parties agree.
The Statutory Basis: Accord and Satisfaction
Whether a debt can be paid in kind rather than in cash is governed by the doctrine of accord and satisfaction, which in Indian law rests on Sections 62 and 63 of the Indian Contract Act, 1872. The two sections work together. Section 62 allows the parties to replace their original bargain with a new one. Section 63 allows the creditor to accept something other than what was promised.
Section 62 deals with novation, rescission and alteration:
"If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed."
The section carries an illustration that maps almost exactly onto a goods-in-lieu arrangement. Where a person owes 10,000 rupees and instead gives a mortgage of an estate for 5,000 rupees in place of that debt, the illustration states, "This is a new contract and extinguishes the old." The illustration speaks of a mortgage, but the principle is not confined to mortgages. It extends to any substituted consideration, goods included. What the section requires is mutual agreement to put a new obligation in place of the old one.
Section 63 goes to the creditor's freedom to accept less, or something different:
"Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit."
The section is illustrated by a case where a person owes 5,000 rupees and pays 2,000 rupees, which the creditor accepts in satisfaction of the whole debt. The whole debt is discharged. The lesson is that even a partial payment can extinguish a full debt if the creditor accepts it as satisfaction. By the same logic, goods can discharge a monetary debt if the creditor accepts them as satisfaction. The operative words are the creditor's, not the debtor's: the promisee "may accept instead of it any satisfaction which he thinks fit." The discretion belongs to the person owed the money.