This article is written by Karan Jayesh Shah and Richa Ray, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “Transferring Assets in a Company”.

Introduction

An Asset is anything of monetary value owned by a business with the expectation that it will provide a future benefit. For a business to earn profit and generate revenue, asset management is of utmost importance. The liability should be less and assets shall be more. It is usually said that the asset is good and liability is bad for business because asset is what you own and liability is what you owe in business. Also, the term, ‘Asset’ is not defined in the Companies Act, 2013.

An Asset can be in the form of tangible asset or intangible asset, movable asset or immovable asset, capital/fixed asset or current asset. In law, the business is entitled to transfer the assets to whomsoever they wish and for whatever reason. Transfer of assets might be carried out for the purpose of survival of the business or in relation to a merger, acquisition, demerger, reconstruction, amalgamation of the business.

The process of transferring assets from one corporation to another is a rather tricky one. If it’s done incorrectly it can have severe tax and legal consequences. Even, the reasons behind making a transfer should also be treated with caution. For example, if the company you’re transferring these assets away from is facing insolvency, a transfer of assets could be perceived as an attempt to obstruct a creditor’s claims process.

Example of Assets: Cash, Property, Professional Service, Goodwill, Plant & Machinery, Land & Building, etc.

When we talk about a company and a business, assets can be divided into fixed assets and current assets. 

Fixed Assets are those assets which have been acquired by the company with the intention of holding it and using it for a long period of time for the purpose of earning income. 

These fixed assets are further divided into three – 

1. Tangible assets – Tangible assets include assets like building, plant and machinery etc.
2. Fixed intangible assets – Fixed intangible assets include those assets that cannot be seen like goodwill, brand recognition, intellectual property etc.
3. Deferred assets – Deferred assets means the cost that has occurred but it can be reported as expenses at a later time due to certain circumstances, for example, prepaid insurance, prepaid rent, prepaid advertising, bond issuance cost etc.

Current Assets refer to those assets of a company that can be conveniently sold, consumed, used, exhausted because of standard business operations within a year.

Current assets are further divided into two:

1. Liquid Assets – Liquid assets include those properties that can be easily converted into cash with no or little loss. For example, cash and cash equivalents, marketable securities, accounts receivable, inventory and supplies, prepaid expenses, other liquid assets.
2. Circulating Assets – circulating assets are those assets which can turn from cash to goods and then back into cash again. For example, X purchases materials to build a product, manufactures the product which results in stock and sells that stock for cash.

Prepaid expense and accrued revenue is also included into current assets. It is very important that companies maintain a record of fixed and current assets separately.

Purpose of transferring assets

Before any company starts planning to sell its assets, it should first have a proper reason and should give an appropriate reason for it which can be answered in:

1. What is the purpose of transfer?
2. What are the specific types of entities involved?
3. What are the financial conditions of the entities that are involved which means debt and asset levels?
4. What is the consideration for transfer?

These questions are very important to answer because if the transfer is not done properly it can lead to some serious legal and tax consequences.

The proper handling of the transfer is dependent upon the entities involved. Each entity should be treated as a separate entity and therefore their assets and liabilities should not be treated as the same. 

Another important factor that should be considered is the financial condition of the entities. If the company is transferring the assets and is facing bankruptcy then it should be viewed as a way of hindering the collection process of the creditors.

Other points to be kept in mind are (a) if the company has shareholders or members, do they also want to be compensated when the assets are transferred.

Therefore, to get a clear picture the Company should always consult a tax lawyer so that any legal consequences can be avoided in future.

Now, let’s discuss various modes of transferring assets of Company.

Methods of transferring Assets of a Company

There are many ways and manner in which assets of the company can be transferred depending upon the number of factors that need to be taken into consideration such as:

1. What kind of company is it?
2. What type of asset is it?
3. The financial condition of the company. 
4. The consideration for the transfer, etc.

Discuss below in detail are few of the standard ways through which assets of a company can be transferred. 

• Capital Contribution

Capital Contribution means bringing capital in the form of cash or other assets into the company. A capital contribution is an asset given to the company in exchange for equity (the value of ownership percentage). An asset can be cash, property or professional services.

The contributor would then own stock (equity) in the company and would be known as a shareholder. This type of financing is different from debt financing wherein the financier would be known as the stakeholder of the company. There are two types of contribution i.e. Equity investment and Debt investment. When an investor claims equity, they have a share of the profits and losses of the company. Higher the investment higher the chance of getting a maximum return and vice versa. Debt investment is kind of taking a loan. Here, the company borrows money from the lender. The lender won’t have any say in the company affairs. Capital contribution is important for new businesses, for the company who wants to expand, for the loss-making company, so that they can revive.

In the case of Sunil Siddharthbhai v Commissioner of Income-tax, the Court held that the transaction of becoming a partner and contribution of an asset of whatever character as capital in the firm in which one becomes a partner is undoubtedly on a capital field, and not in the nature of any commercial or trading transaction.

Capital contribution is nothing but the financial resources or material of the owner in the company to increase equity capital and improve liquidity. There are different types of capital contribution.

(i) Cash deposits – This is the most common type of contribution. Here, money is made directly available to the company which can be done by either bank transfer or cash deposit.

(ii) Contributions in kind – In this kind of contribution the business owner simply makes available a certain type of production to the business. It can be in two forms, Tangible assets like real estate, land, machines, tools and even vehicles. Intangible assets like Securities, patents and licences that can be transferred as private deposits to a company.

(iii) Transfer of use – when a situation arises of standard contribution in kind and the assets are transferred to the company which are privately owned at the time of use, it can be used for operational purposes only. Use is always free of charge but the amount of deposit is valued with fictional rental payment.

(iv) Service – In cases of partnership shareholders can make their labour available and can begin working in the company privately.

• Sale and Purchase

Sale and Purchase is a simple and easy way of transfer of assets as it involves the transfer of an asset in exchange of money from the buyer. Instead of transferring assets as a capital contribution, assets can be directly transferred or purchased by a company. The major difference between the capital contribution and sale and purchase is that it doesn’t create any equity rights in the company.

Sale and Purchase involve direct transactions where the required asset is purchased or transferred from a company in return of consideration i.e. money. The act of sale and purchase of assets needs to be recorded in the books of account.  

Sale and purchase can be for many reasons such as when the company is declared as an insolvent and need to pay back the due or when an existing company wants to change the technology and therefore sell off the existing assets. Sale and Purchase is the most common usual way of transferring the assets in small enterprises. 

U/S 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the security interest (that is an asset) can be enforced even without the intervention of the court.

• Filing an Asset Transfer Document

Certain assets come with deeds or titles proving ownership. With these assets, correct transfer requires that a transfer document be filed and a new deed or title issued.

There are few assets which compulsorily require document filing and therefore whenever a transfer of such assets is done, novation of agreement is carried out and fresh filing of such asset transfer document to the competent authority is performed. If the asset, which is to be transferred is with lien or mortgage then the written consent of the lender or bank is required to complete the transaction. Non-compliance to legal obligations by the parties to the transaction would invalidate the transaction therefore everything shall be carried out as per the requirement of law.

For Example, a Business Transfer Agreement is structured to give effect to a comprehensive sale of assets and liabilities of one entity to another entity. It is in the form of a purchase and transfer of ownership agreement wherein details regarding the sale of the business and its assets are captured.

• Slump Sale

Slump sale is a mere method of corporate restructuring. The mode of transfer, in this case, has to be essentially “sale”. The whole undertaking is sold in a single transaction and the assets overall valuation is calculated. After selling off the undertaking, the entity can continue the business on a going concern basis. 

As per section 2(42C) of Income-tax Act 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

In CIT v Artex Manufacturing Co, the Supreme Court held that in order to constitute slump sale there must be a sale on going concern basis as a whole and where individual items cannot be bifurcated in respect of the entire consideration. 

The exceptions to Slump sale are the following transactions:

1. Sale of Individual assets of an undertaking;
2. Transfer by way of exchange;
3. Compulsory Acquisition;
4. Extinguishment; and
5. Inheritance by will.

 The following are the benefits of the Slump Sale:

1. To improve the performance of the business;
2. To improve focus and eliminate negative synergy and facilitate strategic investment; and/or
3. To avail tax and regulatory advantages associated with it.

The following are the essentials of the slump sale:

1. Sale of the Undertaking- The transaction shall amount to sale and no other mode of transaction with regards to the transfer of undertaking would be considered as slump sale.
2. Going concern basis- After the completion of the slump sale transaction, the ability to continue the business activity is known as going concern basis.
3. Assets and Liabilities- For a transaction to be known as slump sale, the assets and liabilities together need to be transferred in a single transaction and which should amount to sale. The main essence is the transfer of undertaking as a whole. In an event where the assets of an undertaking are transferred without transfer of liabilities, the same shall not qualify to be regarded as a slump sale.
4. Lump-sum consideration without assigning values to the assets- In the slump sale transaction consideration should be as a whole and not attributed individually to assets. The Payment should be lump sum and not in instalments or any other mode.

In the case of Avaya Global Connect Ltd. v Acit Range, the court held that any transfer of an undertaking otherwise than as a result of sale will not qualify as a slump sale.

• Asset Acquisition

The Particular or required assets are purchase/transfer in return of consideration from a company. No Obligation is there on the buyer to buy all the assets and liability of the company as he can pick and choose the assets he wants to buy.  The valuation is carried out for individual components or assets. The rights and liabilities of those particular assets may or may not be transferred to the acquirer as per the mutual agreement. 

Conclusion

Assets shall be more than the liability, as the survival and growth of the company depend on it. Transfer of assets might be carried out for many reasons such as for restructuring, expanding the business, demerger, reconstruction, etc. Many factors need to be taken into consideration before transferring the assets such as the valuation of the asset, where the asset is and where it is required to be transferred, etc.

References

1. Assets Definition (April 02, 2020, 12:41 PM IST), https://www.thebalancesmb.com/assets-definition-2947887
2. How to Transfer Your Business Assets (April 02, 2020, 01:40 PM IST), https://fleximize.com/articles/000571/transferring-business-assets
3. How can I transfer assets from one of my corporations to another? (April 02, 2020, 3:51 PM IST), https://www.entrepreneur.com/answer/222157
4. What is a Capital Contribution? (April 02, 2020, 5:33 PM IST), https://debruinlawfirm.com/what-is-capital-contribution/
5. How to Transfer Assets to Your LLC (April 02, 2020, 06:49 PM IST),  https://www.score.org/blog/how-transfer-assets-your-llc
6. Legal Implication of Business Transfer Agreement, by Legal Team (April 02, 2020, 07:26 PM IST), http://vinodkothari.com/2017/05/legal-implication-of-business-transfer-agreement-by-legal-team/
7. Slump Sale (April 02, 2020, 6:59 PM IST), https://www.bcasonline.org/Referencer201516/Other%20Laws/Company%20Law/slump%20_sale.htm
8. 1997 227 ITR 260
9. Slump sale (April 02, 2020, 07:11 PM IST), https://www.mergersindia.com/levis-and-taxes/the-income-tax-act-1961/slump-sale/
10. Steps Involved In Asset Sale From One Company to Another In India(April 02, 2020, 08:41 PM IST), https://blog.ipleaders.in/steps-for-asset-sale-from-one-company-to-another-in-india/

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