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. The primary motive behind undertaking any such rearrangement would be to prosper both in size and profits. The corporate restructuring process can be either be by any of the much traversed gradual way or a much faster way of selling off the business undertaking. Here it is important to note that the sale can happen in two ways, one is an entity sale and the other is an asset sale. The type of sale is determine which items of the business shall form part of the ownership transfer. A buyer is benefited from an asset sale by availing the depreciation benefits early and avoiding acquiring the former company’s liabilities. However, from a seller’s perspective an entity sale is preferable so as to pay taxes at a low long-term capital gain rate, as compared to the higher ordinary income tax rate applicable on asset sales.
Re-organizing the business whether financial, technological, organizational by way of merger, amalgamation, arrangement, compromise, demerger, acquisition, takeover, strategic alliance or slump sale is a complicated and a lengthy process.
Business Transfer Agreement
Business Transfer Agreement is an agreement executed by and amongst the transferor and the transferee company to by way of executing a slump sale where every asset and the liability of one or more units transferred, sold, leased or assigned to any other for the lump sum consideration. This type of agreement provides ownership of other businesses.
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.
Purpose behind restructuring of business through Slump Sale is as follows:-
- Growth & betterment of the business
- Reaching out to the better profits.
- Reorganizing through slump sale attracts stamp duty only on immovable properties.
- The transferor has to pay a certain amount of capital gain arising from such transfer.
Elements Which Requires Deep Understanding Before Executing Business Transfer Agreement
Importance of Business Transfer Agreements
- It helps in improving the business performance post-integration.
- It helps in facilitating the strategic investments.
- It helps in availing of tax and the regulatory advantages associated with the business.
- It helps in improving the focus on core areas and also helps in optimizing operational synergies
Contents of Business Transfer Agreement
Modes of Execution of Business Transfer Agreement
- Agreement to sell: It is only the way in which respective business undertaking is to be sold shall be laid down. The agreement executed itself does not result in transfer of the undertaking on immediate basis, rather it is an underlying agreement whereby the intent of parties is laid down giving effect to an intended slump sale and the actual sale is carried out by diverse agreements/documents. Therefore, it only remains as an indication of the intention, effectuated by the subsequent binding documents.
- Deed of conveyance: It is the agreement or the Deed which leads to the sale of the business undertaking and the payment of consideration received for the undertaking. In this type of document, parties agrees to transfer the said undertaking and actually effects the transfer of undertaking.
FAQs
Does Agreement to sale means transfer of undertaking?
No, Agreement to sell doesn’t mean the transfer of undertaking, it is merely an instrument where the intention of parties is laid down and parties mutually decide to reach a certain decision of purchase or sale of undertaking.
What are legal and stamp duty implications?
Business Transfer Agreement becomes legally binding when it is printed on judicial stamp paper or an e-stamp paper which is to be signed by both the Transferor(Vendor) and the Transferee(Purchaser), and has been dated. The value of the stamp paper depends state to state in which it will be executed. Each state in India has different provisions in respect of the amount of stamp duty to be paid.