The States Reorganisation Act,1956
Section 87. Contracts
(1) Where before the appointed day an existing State has made any contract in the exercise of its executive power for any purposes of the State, that contract shall be deemed to have been made in the exercise of the executive power-
(a) If there be only one successor State, – of that State;
(b) If there be two or more successor States and the purposes of the contract are, as from the appointed day, exclusively purposes of any one of them, – of that State; and
(c) If there be two or more successor States and the purposes of the contract are, as from that day, not exclusively purposes of any one of them, of the principal successor State;
And all rights and liabilities which have accrued, or may, accrue, under any such contract shall, to the extent to which they would have been rights or liabilities of the existing State, be rights or liabilities of the successor State or the principal successor State specified above:
Provided that in any such case as is referred to in clause (c), the initial allocation of rights and liabilities made by this sub-section shall be subject to such financial adjustment as may be agreed upon between all the successor States concerned, or in default of such agreement, as the Central Government may by order direct.
(2) For the purposes of this section, there shall be deemed to be included in the liabilities which have accrued or may accrue under any contract-
(a) Any liability to satisfy an order or award made by any court or other tribunal in proceedings relating to the contract; and
(b) Any liability in respect of expenses incurred in or in connection with any such proceedings.
(3) This section shall have effect subject to the other provisions of this Part relating to the apportionment of liabilities in respect of loans, guarantees and other financial obligations; and bank balances and securities shall notwithstanding that they partake of the nature of contractual rights, be dealt with under those provisions.