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Structuring A Slump Sale

Business restructuring is a comprehensive process be it financial or technological or market or organisational. There are various modes by way of which it can take place such as re-organisation of capita, compromise/arrangement, merger/amalgamation, demerger, acquisition/takeover, slump sale, strategic alliance and such other similar modes.

What is a Slump sale?[1]

Slump Sale means the transfer of one or more undertakings against a lump sum consideration without values being allocated to the individual assets and liabilities.

In other words, slump sale means transfer of the entire business unit for a single lump sum consideration without assigning value to individual assets and liabilities. Under the slump sale the business is sold on a 'going concern basis' that is there is transfer of all assets/ liabilities, contracts, employees, etc so that the business able to carry on its activities as before such sale.

Preconditions of a Slump Sale:[2]

  • As per Section 180 of the Companies Act, 2013 which imposes the restrictions on the power of the Board, The first one 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.'

    Henceforth, in case of slump sale, section 180 of Companies Act, 2013 will be attracted and the Concerned Company would be required to pass a special resolution by calling the general meeting of the Company for undertaking the Slump Sale Transaction.
  • In case of Private Company, no Special Resolution is required under Section 180 of CA, 2013.

The essential elements of slump sale:

  • Sale of the undertaking:
    The mode of transfer in this case has to be essentially "sale". No other mode of transfer of the business undertaking will amount to a slump sale transaction. In the case of Ece Industries Ltd. vs Deputy Commissioner of Income Tax it was held that even if one out of several undertakings were sold, it would still amount to slump sale.
  • Assets and liabilities:
    The main essence of slump sale is the transfer of an 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.
  • Lump sum consideration without assigning values to the assets: Consideration should be as a whole and not attributed individually to assets. It should be one time consideration and not in installment or any other mode.
Anti-trust clearance:
Combinations under the Competition Law means mergers, amalgamation of companies or acquisition or control, shares, voting rights or assets of one company by another company or group.

If the business transfer qualifies as a 'combination' then such combination would require prior consent of Competition Commission of India ("CCI") and would be regulated by the Competition Act and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations). CCI would examine if the combination causes or is likely to cause an appreciable adverse effect on competition (AAEC) in India and would decide on the matter accordingly.

Business Transfer Agreement:
A Business Transfer Agreement ("BTA") is structured to give effect to a comprehensive sale of assets and liabilities of one entity to another entity. It is in a form of a purchase and transfer of ownership agreement wherein details regarding the sale of the business and its assets are captured. It outlines the type of transfer, type of sale, terms of sale and details of the transferrable. The BTA, inter-alia, lists down the assets, liabilities, capital, contracts, customer lists, leases, employee insurance, new employment rights, inventory, tax issues, copyrights and patents.

In common parlance, the transaction envisaged in a BTA is also referred to as slump sale. In order to give effect to such transaction, the parties typically enter into a BTA.

  2. Page No. 6,

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