This article is written by Sudhanshu Kathuria and Rishika Agarwal.
A Slump sale can be defined as a sale where no particular value is given to the assets and liabilities of a business on a going-concern basis. This article briefly talks about the manners of affecting a Slump sale. Primarily a Slump sale can be made through a Business Transfer Agreement or through a Scheme of Arrangement under section 230-232 of Companies Act, 2013.
Slump sale through a BTA is less time-consuming and confusing than the Scheme of Arrangement. However, it is still the less favoured way for the companies when the stakes are higher. There are numerous factors that determine which method is better in what condition. This article will highlight such factors and briefly explain the procedures of effecting a Slump sale through each of the methods.
A slump sale means the transfer of an undertaking by way of a sale for a lump sum consideration on a going concern basis and as is where is basis with no values to the individual assets and liabilities being assigned. The term “undertaking” includes “part of the undertaking” but whatever undertaking is transferred, it must constitute a business unit or division to be carried on without any interruption as per section 2 (19AA) of the Income Tax Act, 1961 “(ITA)”. Section 2(42C) of the ITA provides that slump sale is nothing but “a transfer of one or more undertakings as a result of the sale for a lump sum consideration with no individual value being assigned to each asset and liability.”
As per section 2(19AA) explanation 1, an undertaking includes any part of an undertaking or a business activity taken as a whole but doesn’t include in its definition any individual assets or liabilities or any combination thereof that do not constitute a business activity. The cost of acquisition of undertakings can be determined through the help of independent valuers. The consideration is paid to the transferor company, not its shareholders.
A slump sale is different from the process of an asset sale. From a seller’s perspective, a business transfer by way of slump sale is often preferred because low long-term capital gains tax is levied in comparison to higher ordinary income tax rate levied on an asset sale among other reasons. An asset sale would be advantageous for a buyer by availing the early depreciation benefits and skipping the acquisition of the transferor’s liabilities.
Essentials of a slump sale are that transfer of the whole or substantially the whole of business undertaking on a ‘going concern basis’ and ‘as is where is basis’ is effected on consideration of a lump sum amount without assigning separate value to assets and liabilities.
Additionally, according to the judgment, Areva T & D India Ltd. vs The Commissioner of Income Tax on 30 March 2012, the consideration involved should be monetary in nature for a valid slump sale to take place.
The purpose of restructuring a business through a slump sale could be:
- Business growth;
- Better profits;
- Stamp duty only on immovable properties;
- Low capital gain tax instead of ordinary tax on an asset sale;
- Cost-effective process;
- Takes minimal time in procedure & execution.
Two manners to affect a slump sale:
- Business Transfer Agreement “(BTA)”
- Scheme of Arrangement
- Business Transfer Agreement (BTA)
A Slump sale is typically effected through a business transfer agreement (BTA). A BTA is an agreement between a transferor and a transferee company to execute a slump sale wherein ownership of every asset and liability of one or more units transfers, sells, leases or assigns to another for a lump sum consideration.
After the rounds of negotiations, a BTA is executed within 1-2 months after entering into the contract. BTA is advisable for certain businesses because primarily it helps to avail of tax and regulatory advantages, among other reasons. Such reasons could be relating to improved performance of business post-integration, operational synergies, and strategic investments. A BTA must mandatorily disclose the following in its clauses among other relevant clauses as deemed fit.
- Schedule of Assets;
- Schedule of Liabilities;
- Detail of creditors;
- List of contracts;
- List of employees;
- Lump-sum consideration;
- Detail of intellectual property;
- Name of parties;
- Address of parties;
- Pending suits;
- Requisite representations and warranties;
- Closing date.
Be aware of the kind of BTA being entered into – an agreement to sell or a conveyance deed. The difference between the two BTAs is close and perceived as interchangeable in a layman’s world; however, the legal implications on the two BTAs are different. Section 4(3) of Indian Sale of Goods Act, 1930, provides that under a contract of sale where the property is transferred to the buyer, the contract is called a sale, whereas the contract is called an agreement to sell if the transfer of the property is agreed to take place at a future date or subject to certain condition to be fulfilled. In this reference, the former contract called a sale is known to be a conveyance deed and the latter an agreement to sell.
In crux, in a BTA structured as an “agreement to sell”, the manner of sale of the business undertaking is laid down and parties have agreed for such transfer through this agreement. The agreement to sell does not result in any immediate transfer of the undertaking on its own. Therefore, a BTA structured as an ‘agreement to sell’ lays the indication of intent to give effect to such slump sale along with the specifics, which is effectuated into a true sale by subsequent binding documents.
The other form of BTA, where the BTA itself causes the sale of business undertaking and payment of consideration thereof, is the conveyance deed. This BTA itself consummates the sale and naturally leads to the payment wherein no further binding element is required.
The general principle is that stamp duty is payable on and determined by the instrument and not the transaction. To calculate the stamp duty liability for a transaction, it is important to be clear about the instruments involved in the transaction and the subject matter of the same
The state-specified amount of stamp duty is levied on each transaction as provided for in each state legislation and in case of any lacuna, the Indian Stamp Act, 1899 (ISA) provides for the same. It’s recommended to refer to Section 5 and 6 of the ISA, 1889 to understand the stamp duty implication of such transactions. Article 5 to the schedule of ISA, 1899 prescribes the stamp duty chargeable on an “Agreement”.
If a contract does not intend to operate as an immediate transfer of the sale of property, such instrument is provided to be stamped under Article 5(c) as an agreement to sell rather than a conveyance deed. A conveyance deed shall be stamped as per Article 5. It is generally advised to use an agreement to sell instead of a conveyance deed simply because the stamp duty is considerably lesser for an agreement to sell compared to a conveyance deed.
- Scheme of arrangement (under section 230-232)
Scheme of Arrangement is a pre-approved agreement between a company and its shareholders. It can be used for a solvent as well as insolvent restructuring of a company. A slump sale can be effected by a scheme of arrangement under section 230-232 of the Companies Act, 2013.
Section 230 of the Companies Act, 2013 talks about compromise, arrangement and amalgamation including takeover (sub-sections (11) and (12) have been notified on February 03, 2020). According to this section a company may file an application under section 230(1) with NCLT for any compromise, arrangement or takeover along with supporting documents such as material facts, reduction of share capital, consent of creditors (75%) and other required disclosures. On receiving such an application, the NCLT shall order a meeting for all the shareholders and creditors of the company.
A draft scheme of arrangement shall be prepared for getting an approval in the board meeting. An application shall be filed under section 230(1) with the NCLT in form no. NCLT-1.
Application for Arrangement
An application shall be filed for sale and transfer of an undertaking as a going concern on a lump sum basis. Such an application shall be accompanied with the relevant documents mentioned under Rule 3 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
Directions for Meeting by NCLT
Upon hearing of the application, NCLT shall give such directions in determining the class of creditors whose meetings have to be held for considering the proposed arrangement.
The Tribunal may also give directions in the following matters:
- Time and place of the meeting.
- Appointing a Chairperson and scrutinizer for the meeting to be held along with terms of his appointment.
- Fixing the quorum and the procedure to be followed at the meeting along with voting in person or by proxy or by postal ballot or by voting through electronic means.
- Determining the values of creditors of any class whose meetings have to be held. e. Notice to be given of the meeting and advertisement of such notice.
- Notice to be given to sectoral regulators or authorities such as income tax authorities, Reserve Bank of India, Securities and Exchange Board of India and other sectoral regulators or authorities which may be affected by the arrangement and shall require representations within thirty days from the date of receipt of such notice. However, if no representations are received it shall be presumed that such authorities have no representations to make on the proposal.
- The time within which the chairperson of the meeting is required to report the result of the meeting.
Notice of the meeting
The notice of such a meeting in Form No. CAA.2 shall be sent to all the members, creditors and the debenture holders of the company individually at the address registered with the company at least one month before the date fixed for the meeting.
Communication of the notice
The notice shall be sent by either:
- The Chairperson appointed for the meeting;
- The company;
- Any other person as Tribunal may direct.
The notice shall be sent through the following modes:
- Registered post, speed post or courier;
- Email or hand delivery;
- Any other mode as Tribunal may direct.
Accompanying documents to the notice
The notice of the meeting shall be accompanied by a copy of the proposed scheme of arrangement and a statement disclosing the following details of the arrangement
Details of the order of the Tribunal:
- Date of the Order;
- Date and hour along with the Place of the meeting.
Following details of the company are required to be sent along with the notice of the meeting:
- Corporate Identification Number or Global Location Number of the company. b. Permanent Account Number.
- Name of the Company.
- Incorporation date of the Company.
- Type of the Company.
- Address of Registered office and Email Address.
- Summary of main object according to the MOA and main business carried on by the company.
- Details about change of name, registered office and objects of the company within the last five years.
- If the company is a listed company then the name of the stock exchange(s) where securities of the company are listed.
- Details of the capital structure of the company along with authorised, issued, subscribed and paid-up share capital.
- Names and address of the promoters and directors.
Along with the above-mentioned details, the fact and details of any relationship subsisting between such companies who are parties to such scheme of arrangement, including holding, subsidiary or associate companies are also required to be informed.
The following details of the Board Meeting in which the scheme was approved by the Board of Directors:
- The date of the board meeting.
- The name of directors who voted in favour of the scheme.
- The name of directors who voted against the scheme.
- The name of directors who did not participate in the meeting.
Explanatory statement disclosing details of the scheme of arrangement including:
- Parties involved in such arrangement.
- The appointed date, effective date, share exchange ratio and other considerations.
- Summary of valuation report including basis of valuation and fairness opinion of the registered valuer and the declaration that the valuation report is available for inspection at the registered office of the company.
- Details of capital or debt restructuring.
- Rationale for the arrangement.
- Amount due to unsecured creditors.
Disclosure about the effect of the arrangement on key managerial personnel, directors, promoters, non-promoter members, depositors, creditors, debenture holders, deposit trustees and debenture trustees and employees of the company as per section 230(3) of the Companies Act, 2013.
Some documents such as the latest audited financial statements of the company, contracts or agreements material to the compromise or arrangement, the certificate issued by auditor of the company to the effect that the accounting treatment proposed in the scheme of arrangement is in conformity with the Accounting Standards prescribed under section 133 of the Companies Act, 2013 are required to be made available for inspection by the members and creditors in order to make decision for or against the scheme.
Advertisement of the notice
The notice of the meeting shall also be advertised in two newspapers, one English and one vernacular newspaper. In addition to that, the same notice shall be made available on the company’s website. In case of a listed company the notice has to be sent to SEBI and Stock Exchange(s) to make it available on their websites as well.
The persons to whom the notice for the meeting was sent may vote themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement within one month of receipt of the notice. However, an objection to the scheme may be made by persons holding at least 10% of the shareholding or has an outstanding debt amounting not less than five percent of the total outstanding debts as per the latest audited financial statement.
The chairperson of the meeting shall submit a report to the Tribunal on the result of the meeting in Form No. CAA.4.
Petition for confirming the scheme
When the proposed scheme of arrangement is agreed to by the members of the meeting, the company shall present a petition to the Tribunal within seven days of the filing of report by the Chairperson in Form No. CAA.5 for sanction of the scheme.
On receipt of such petition, NCLT shall fix a date for hearing of the petition. A notice for the same shall be advertised in the same newspapers in which the notice of the meeting was advertised at least ten days before the date fixed for the hearing and a copy would be sent to the objectors.
NCLT shall sanction the scheme in Form No- CAA 6. The order for sanction shall be filed with the Registrar of Companies within 30 days in e-form INC 28.
On sanctioning the scheme, section 231 empowers the Tribunal to supervise the implementation of such scheme. The Tribunal may also make any modifications in the arrangement that it may consider necessary for the proper implementation of the arrangement.
Where an order has been made under section 232(1) of the Companies Act, 2013, the merging companies or the companies in respect of which a division is proposed shall be required to circulate the following documents for the meeting ordered by the Tribunal:
a. The draft scheme of arrangement adopted by the directors of the merging company.
b. Confirmation that a copy of the draft scheme has been filed with the Registrar.
c. A report by the directors of the merging companies explaining the effect of the scheme on each class of shareholders, key managerial personnel, promoters, non-promoter shareholders laying out, in particular, the share exchange ratio.
d. Expert report with regard to valuation.
e. A supplementary accounting statement if the last annual accounts of any of the merging companies relate to a financial year ending more than six months before the first meeting of the company occurred for approving the scheme.
The Tribunal, after the procedure in section 232(1) and 232(2) have been complied with, by order, may make provisions on certain matters.
An order under section 232 read with section 230 of the Companies Act, 2013 shall be in Form No. CAA.7 with such variation as required.
The transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties, the allotment by the transferee company of any shares, debentures, in the company which are to be allotted by that company under the scheme of arrangement, the transfer of the employees of the transferor company to the transferee company and such other matters as mentioned in section 232(3) of Companies Act, 2013.
Till the scheme is fully implemented, every company shall file a statement of compliance with the Registrar of Companies in Form No. CAA.8 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014 within two hundred and ten days from the end of financial year.
Taxation aspects of slump sale
Taxability shall arise in the year of the transfer of undertaking by way of sale. Section 50B of the Income Tax Act, 1961 (ITA) provides the mechanism for computation of capital gains arising on slump sale and overrides all other provisions of the Act. Any gain derived from the slump sale in the previous year is taxed as capital gains arising from such transfer. When the undertaking has been owned for less than 36 months, then it shall be considered as a short-term capital gain and when held for more than 36 months, then a long-term capital gain. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. There shall be no indexation benefit available in capital gains due to slump sale.
For stamp duty liability in case of BTA, Article 5 and 5(c) of the Indian Stamp Act shall be referred to and different rates are applied to ‘agreement to sell’ and ‘conveyance deed’. Scheme of arrangement for a slump sale also amounts to conveyance and therefore stamp duty is payable in this process as well at the rate of conveyance deed. In relation to above statements, section 2(42C) of explanation 2 of ITA, 1961 provides that the determination of the value of an asset or liability for the sole purpose of payment of the stamp duty, registration fees or other such taxes or fees shall not be regarded as assignment of values to individual assets or liabilities and therefore the transaction will still be considered to be a valid slump sale. The same has been laid down in DCIT vs. M/s. Summit Securities Ltd, & Cyfast Enterprises Pvt. Ltd. vs. DCIT
Prior permission of tax authority (conditions precedent)
Section 281 of the ITA provides that an assessee is required to obtain the permission of the assessing officer before creating a charge on certain assets or transfer of certain assets when there is any pending tax proceeding or pending demand against such assessee. The provision is aimed at safeguarding the interests of the revenue department as and when the assessees try to evade tax liability by fraudulently parting with their assets. Obtaining prior permission or no-objection certificate “(NOC)” as per section 281 of ITA is a mandatory ‘conditions precedent’ in any merger, acquisition, or a similar transaction including a slump sale, also known as the ‘Section 281 Certificate’.
In absence of grant of such permission, which is applied for 30 days prior to such proposed transfer, the transaction could risk being voided by the tax authorities. A common annoyance regarding such compliance is the amount of time taken to obtain the permission. It must be kept in mind that ‘section 281 certificate’ is required only when an assessee creates a charge or parts with possession of any asset.
Compliance under the Companies Act
Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the restrictions is ‘to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.’
Therefore, in case of slump sale, a special resolution of the members shall be required under section 180. For the purpose of section 180, ‘undertaking’ means an undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.
A slump sale is a solution to many issues regarding transfer of undertakings in the M&A industry as it has more ups than downs like cost-effectiveness due to tax benefits, lump-sum concept and time effectiveness. Time is saved under slump sale because a straight procedure with fewer & simpler compliances is available through BTA, although, the transaction of slump sale requires special resolution of the board of directors. It is a highly recommended way to go for even when the stakes are high. It has to be noted that a slump sale is different from a demerger or a slump exchange. A business having less time at their disposal is recommended to go for a business transfer agreement “(BTA)”.
It is generally advised to draft a BTA by the mode of an ‘agreement to sell’ rather than a ‘conveyance deed’. Whereas, a company requiring to bring rather more validity to such transactions may go ahead with the procedure of scheme of arrangement. The latter one is a formal process requiring nods of various relevant authorities and stakeholders, which also indicates that the company values the opinions of the stakeholders as well. Moreover, slump sale through scheme of arrangement is recommended when a company is planning internal restructuring by selling a business undertaking among its own subsidiaries. Furthermore, certain compliances, permissions, and tax liabilities need to be accounted for while making such decisions regarding the manner of effecting the proposed slump sale. It is a highly recommended process of transfer of business as is evident from the abundant examples of successful slump sales in the contemporary industry.
- http://vinodkothari.com/2017/05/legal-implication-of-business-transfer-agreement by-legal-team/
- http://vinodkothari.com/2019/11/schemes-under-section-230-with-a-pinch-of-section 29a/#:~:text=Section%20230%20of%20the%20Companies%20Act%20requires%20t hat%20the%20notice,nonpromoter%20members%2C%20etc.&text=If%20the%20person%20is%20a,he%20is %20entitled%20to%20vote
- https://www.novojuris.com/thought-leadership/income-tax-clearance-m-a-or secondary-transactions.html
- Areva T & D India Ltd. vs The Commissioner of Income Tax
- DCIT vs. M/s. Summit Securities Ltd., ITA No.4977/Mum/2009
- Cyfast Enterprises Pvt. Ltd. vs. DCIT – ITA No. 1878/Mum/2015
- Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 11. Companies Act, 2013
- Income Tax Act, 1961
- Indian Stamp Act, 1899
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