Often companies would like to sell their assets either due to a downturn or due to other strategic reasons like focusing on a new business area where the assets cannot be reused or relocation to a more profitable jurisdiction where physical transfer of existing assets is difficult or not possible. Compliances and procedure to be followed for transfer of assets are quite complex for public companies. Lawyers and other professionals who can help the clients on devising strategies and can complete the documentation of such transactions are well sought after in the industry. Directors and top CXOs can understand the business strategy, their rights and actions that they need to take to make the transaction smoothly without falling into any legal trouble.
What is asset sale/transfer?
Asset transfer is generally done through three modes:
- Asset acquisition – The individual assets are identified and valued and then transferred as a product or asset.
- Slump sale – Where the total assets of the business unit are valued together and the business unit is transferred as a whole.
- Demerger – Where the business division of a company is transferred in lieu of shares issued to the shareholders of the seller. It is undertaken through a scheme of arrangement which needs to be approved by the High Court. (Provisions related to demerger through NCLT has not been notified as of 15th September, 2016) (Please note, in this chapter we will not be discussing the process involving demerger)
In India, asset sale is generally done through “slump sale,” which involves the process of transferring set of assets of the company by executing a business transfer agreement in exchange for cash. The transfer agreement would regulate certain aspects including liabilities, assets, employees, licenses and contracts of the business that is being transferred. Generally, in slump sale, valuation is not done for individual component or assets, but is done only for the whole of the business undertaking/asset that is transferred.
In slump sale, the tax incentives and benefits of the existing business can be transferred to the new owner and is a more tax efficient structure that in case of asset acquisition. Transfer of assets structured as a slump sale, would be considered as “sale of business” and not as sale of goods as in the case of asset acquisition and thus VAT will not be applicable in such case, but stamp duty needs to be paid on the transfer of the value of the business rather than on the sale of individual assets. The seller of the asset will be liable for paying capital gains tax which will generally be taxed at 20% (plus surcharge and cess) for long term assets (assets held for more than 36 months) or at 30% for short term assets (assets held for less than 36 months).
Comparison between slump sale and asset acquisition
|Slump sale||Asset acquisition|
|The buyer needs to purchase the whole of the business undertaking||The buyer can pick and choose the assets it want to buy|
|Valuation is not done for individual component or assets, but is done only for the whole of the business undertaking/asset||Valuation is done for individual component or assets, but is done only for the whole of the business undertaking/asset|
|The rights of liabilities of the assets are transferred to the buyer||The rights and liabilities of the assets may or may not be transferred to the buyer as per the mutual agreement|
|The tax incentives and benefits of the existing business can be transferred to the new owner||The tax incentives and benefits of the existing business cannot be transferred to the new owner|
|VAT will not be applicable.||VAT will be applicable.|
Let us understand the procedure involved in selling/transferring the assets of a company as per Companies Act, 2013.
How to transfer assets of a company through slump sale / asset acquisition?
Step 1: The Board of Directors must pass a resolution to the effect of sale of assets/undertaking of the company as per Section 179.
Steps applicable only for public companies where the asset in question constitutes more than 20% of the total net worth of the company or the asset/undertaking is generating more than 20% of the total income of the company in the previous financial year. (See Section 110 of the Companies Act, 2013 r/w Rule 22 of the Companies (Management and Administration) Rules, 2014).
Steps 2-4 and 6 is not required to be followed for private companies and for asset sale of public companies where the valuation of the asset is less than the before mentioned threshold. However, companies can frame their respective procedure for such asset sale within their constitutional documents of the company.
Step 2: Board of directors of every listed companies and all public companies i) with a paid up capital of INR10 crores or more; or (ii) having turnover of INR100 crores or more; or (iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding INR 50 crores or more will refer to the Audit Committee for valuation of the undertaking and assets of a company (See section 177(4)(vi) of the Companies Act, 2013).
Step 3: Notice must be given to the members that the resolution for asset sale is proposed to be passed as a special resolution by way of postal ballot / electronic voting. The notice must be accompanied by an “Explanatory Statement”, pertaining to the said Resolution, mentioning the material facts concerning the item and the reasons should also be enclosed along with a Postal Ballot Form (See Section 102 of the Companies Act, 2013). Click here to download a sample notice of asset sale
Step 4: The Resolution will have to be passed by a special resolution (received through postal ballot). Vote must be received within thirty days from the date of dispatch of the notice to be considered as a valid vote.
Step 5: If the resolution is successfully passed, the Board will authorize a person to finalise and execute necessary documents including but not limited to definitive Agreements, deeds of assignment / conveyance and other ancillary documents, with effect from such date and in such manner as is decided by the Board. Click here to download Business Transfer Agreement.
Step 6: Form MGT – 14 along with the resolution and notice given under Section 102 must be filed with the ROC within 30 days along with required fees.