The Business Transfer Agreement is a very crucial document for completing business transactions as it helps to improve the performance of business post- integration. The transfer of business also lets the company to focus on core areas, thereby optimizing operational synergies. The Business Transfer Agreement is a very crucial document for completing business transactions as it helps to improve the performance of business post- integration. The transfer of business also lets the company to focus on core areas. Name of the Transferee and Transferor should be mentioned along with their authority should be stated clearly. Their addresses should also be mention in business transfer agreement.
This model is beneficial in tax and monetary advantages. According to Income Tax Act, 1961, the slump sale is a transfer of one or more undertakings as a result of the sale, for lump sum consideration, without values being assigned to the individual assets and liabilities.According to Income Tax Act, 1961, the slump sale is a transfer of one or more undertakings as a result of the sale, for lump sum consideration, without values being assigned to the individual assets and liabilities. The Business Transfer Agreement is a very crucial document for completing business transactions as it helps to improve the performance of business post- integration. The transfer of business also lets the company to focus on core areas, thereby optimizing operational synergies.This model is beneficial in tax and monetary advantages. According to Income Tax Act, 1961, the slump sale is a transfer of one or more undertakings as a result of the sale, for lump sum consideration, without values being assigned to the individual assets and liabilities.
What are known as business transfer and slump sale?
The term business is defined under Section 2(17) of the Goods and Services Tax Act, 2017, which includes a wide range of activities falling under its purviews like trade, commerce, manufacture, profession, vocation, adventure, wager, supply, and acquisition of capital goods, services supplies and other ancillary and incidental activities, out of which some benefit generally pecuniary in nature is derived.
In the Indian context, the terms “slump sale” and “business transfer” usually refer to the same concepts. ‘Slump sale’ is purely a tax concept and the Income Tax Act, 1961 (ITA) defines a slump sale under Section 2 (42C). It implies the transfer of an entire undertaking on a continuous process basis at a lump sum monetary consideration by the interested acquirer of the business. Slump sale is the process of selling or transferring, one or more business undertakings, in consideration of a fixed lump sum value, in which along with the business, the assets and the liabilities of such a business undertaking are also transferred to the buyer which is acquiring the same, without individual evaluation of each asset. The definition of slump sale under ITA makes it clear that transfer by way of sale is what would constitute a slump sale and not transfer by any other mode.
What is a business transfer agreement?
The business transfer agreement is a legal document in which interested parties, one willing to acquire the said business and the other willing to sell the said business, enter into to govern their relationship, engagement, and liabilities. It is a document that is given structure in a way as to give effect to a comprehensive and extensive sale of assets and liabilities which would flow from one entity to another. It is basically a form of purchase of ownership of a business in consideration and thereby transfers of its assets and liabilities incidental thereto from the seller to the purchaser. Appropriate and clear details relating to the sale of business, its assets, and liabilities are to be mentioned in the agreement, to give the party acquiring the same a definitive condition of the business. The focus area of such an area is the type of transfer, type of sale, tax liability, terms of sale, representation of parties, list of assets, liabilities, capitals, loans, contracts, customers, employees, insurances, intellectual property and related matters are necessarily mentioned. Since corporate governance is a complex field and involves tax liabilities also, it is extremely essential to structure the business transfer agreement comprehensively.
What are Business Transfer Agreements and what constitutes such kind of agreement?
For any company, the restructuring of its business is extremely difficult, be it financial, technological or even organisational by the process of merger, amalgamation, arrangement, compromise along with the strategic alliance. The business transfer agreement is an agreement between the transferor to the transferee company to execute the transfer and sale of an entire business undertaking of the seller on a growing concern based on a lump sum consideration.
In India, the word business transfer is often used interchangeably with a slum sale. Under the Income Tax Act, 1961 the word slum has been defined under Section 2(42 C) as nothing but a transfer of one or more undertakings as a result of the sale for lump sum consideration without values being assigned to the individual assets. For a business transfer transaction, the following are some of the fundamental requirements:
- Transfer by way of sale: Under Section 2(47), it recognises multiple forms of transfers two of them being transferred by way of sale and transfer by way of exchange. According to the section mentioned above, a slump sale would only be constituted if it is done through the transfer of an exchange and not by any other method.
- Transfer by way of an undertaking- Essentially the transferable things that are required to be transferred are undertakings of the seller. The competent parties for such a transaction have the liberty to identify and agree upon such an undertaking to be transferred.
- Going concern basis- The test kays down the ability to continue te business activity even after the transactions. Sometimes it may happen that without any reasons for the undertaking to be necessarily a slump, it can be inferred that it is not necessary that the undertaking should be a slump to affect the slump sale.
- Lump-sum consideration- The consideration for the slump has to be a lump sum figure rather than that of it being attributed or paid investments. It is not individual assets that the buyer is buying rather than that stand-alone business in entirety. Thus the considerations have to be a whole rather than that of it being done in investments.
- Assets and liabilities- The main essence of an undertaking is the transfer of an undertaking as a whole. If it is found or does happen that the transfer assets of an undertaking are done without the transfer of liabilities, then the same would not qualify to be regarded as a slump sale. In such a circumstance, it cannot be said that the undertaking has been transferred as a whole and that consequently, the provisions of the sale cannot be applied.
The slump sale or the business transfer agreement is an attractive option for a business that would want or desire of sharing or selling an undertaking, with regards to the complexities involved in it in determination to the various costs and taxes in the case of transfer of business.
Features of Business Transfer Agreement
1.Schedule of Assets: In the business transfer agreement schedule of asset is prepared which is basically a list of all the assets which is present with the business.
2.Schedule of Liabilities: In a similar manner list of liabilities which are present in the business in the business transfer agreement.
3.Detail of creditors: It contains information regarding the creditors of company along with the names, details of their credit.
4.List of contracts: All the important contract and their details thereunder shall be prepared and disclosed to the transferee
5.List of employees: In order to carry out integration smoothly it’s important that the list of current employees are to be provided by transferor to transferee
6.Lump-sum consideration: The consideration under business transfer agreement is done through a lump sum amount and not on the basis of specific assets.
7.Name of parties: Name of the Transferee and Transferor should be mentioned along with their authority should be stated clearly. Their addresses should also be mention in business transfer agreement.
8.Closing date: It is the date under which the whole process of transfer should be completed
Importance of Business Transfer Agreement
- It helps to improve the performance of business post-integration.
- It helps to improve focus on core areas and optimize operational synergies.
- It helps to facilitate strategic investments.
- It helps to avail of tax and regulatory advantages associated with the business.
Modes of execution of Business Transfer Agreement
- Agreement to sell – It in this the manner in which the business undertaking shall be sold will be provided. There is no immediate transfer of undertaking but this agreement lists out the intention of the parties.
- Deed of conveyance – Through this agreement, there is a sale or transfer of an undertaking and consideration is paid for such transfer. It is also referred to as a sale deed
Essential clauses in a business transfer agreement and their implications
- Parties to the agreement – This clause basically defines who the parties are who are entering into the said agreement and incorporates their correspondence details clearly so as to identify them. It is important to look into aspects of residency when it comes to business because a non-resident is not allowed to conduct business in India without having a functional place of business in the territory of India. Therefore, for a non-resident business to give effect to such a business has to establish a place of business in India and comply with the provisions of the Companies Act, 2013 for the same.
Recitals clause- The recitals clause is essential for anyone reading the agreement to get a general background of the circumstances under which the parties are entering into the agreement. It is not an operative clause, but rather a substantive clause, giving an idea about the present stand of the parties, which might be useful for the interpretation of the agreement as a whole or some clauses in the agreement. It also highlights the intention of the parties entering into the agreement. A sample clause can be:“WHEREAS:
- Seller is engaged in the business of [●] (“undertaking”), and has a place of business at [●].
- Purchaser is engaged in the business of [●], and has a place of business at [●].
- The seller desires to sell and the purchaser desires to purchase the undertaking, as a going concern on a slump sale basis (as defined under Section 2(42C) of the Income Tax Act, 1961), i.e. for a lump sum consideration without assigning individual values to assets and liabilities, upon the terms and conditions set forth herein with effect from the [●].”
Transfer and description of transfer- This is one of the main operative clauses in the agreement wherein the process and procedure of transfer are explained. This is the clause that actually defines the nature of the transaction between the parties and lists out how it is to take place. It is necessary that this clause is drafted precisely and defines the mode of transfer and the liabilities attached thereto, without leaving any scope for ambiguity. It is important to list out all the assets and liabilities under this clause. A separate schedule can also be attached for the same, which clearly should list out all the details of the assets and liabilities and any encumbrances on the former. One possible way of drafting this clause could be:“In consideration of and subject to the fulfilment of the terms and conditions of this agreement, the seller shall, on the closing date, irrevocably and unconditionally transfer, grant, sell, convey, assign and deliver, as a going concern, to the buyer, [free and clear of all encumbrances] and the buyer shall accept, purchase and acquire, as a going concern, from the seller, all of the seller’s rights and interests in and title to the business and all the assets and liabilities thereto, including everything as listed out in Schedule A of this agreement”.
Specific requirement – Some specific requirements related to the assignment of contract and assumption of liabilities should be incorporated under the agreement. This can be covered under the transfer clause also, however, if not covered there it can be covered under a specific clause thereafter. These could be drafted in the following manner:
- Assumption of liabilities-Notwithstanding anything to the contrary contained in this agreement, on the terms and subject to the conditions set forth in this agreement, at closing, the purchaser shall assume all the liabilities of the seller in relation to the undertaking (the “assumed liabilities”) as listed out in Schedule A, whether pertaining to the period prior to the effective date or thereafter including but not limited to:
- Any accounts payable and any liabilities under the assumed contracts, permits and leased real estate; and
- All liabilities for taxes relating to the assets and the undertaking for all taxable periods (or portions thereof) whether prior to or after the effective date.
- Assignment of contracts
- Subject to this clause, the assumed contract shall be assigned/novated/transferred to the purchaser by a mutually agreed deed of novation/assignment from the effective date.
Purchase consideration –Generally, most disputes in contractual relations arise due to discrepancies regarding the payment, consideration amount, or the payment terms, thus it is crucial to draft the consideration clause with extreme diligence, to specify how the payment is to be done and received by the parties. Further, it should also state the consequences of delayed payment or non-payment. This clause is supposed to define the nature, amount, currency, and mode of payment that will be adopted by the purchaser. This clause could look like:“The consideration for the irrevocable and unconditional transfer, grant, sale, conveyance, assignment and delivery of the Business on a going concern basis, on the terms and conditions of this agreement, shall be a one-time lump sum of Rs [∙] (Rupees in words), hereinafter the ‘purchase consideration’, which shall be paid by way of a bank transfer from the purchaser’s merchant to the seller’s bank through National Electronic Funds Transfer(NEFT). The buyer shall pay to the seller the purchase consideration on a slump sale basis. The purchase consideration shall be paid and discharged [on the closing date] in accordance with this agreement.”
Representation and warranties of the parties – This is an essential clause which states that only upon certain representations made by both the parties, they have agreed to enter into the agreement and if any party is found in breach of any of the representation, the agreement could be subject to termination. Warranties are something which is sort of an affirmation made by the parties to ensure to do certain things and guarantees made by them in relation to their representations. In a business transfer agreement, the seller makes promises to the buyer in relation to the assets and liabilities and the buyer ensures that he has the legal capacity to buy them. Further, a seller is supposed to undertake that he is permitted to sell the business according to the laws of India. This clause is an embargo to the protection of future rights of the parties.
Intellectual property with respect to brand usage – Intellectual property can be considered as the creations of the mind, such as inventions, literary and artistic works, designs and symbols, names, and images used in commerce. In the course of a business, a business may create intellectual property like its own brand name, symbol, designs, or other related products which qualify as intellectual property. Intellectual property is protected by law, for example, the patents, copyright, and trademarks, which enable people to earn money, having an exclusive right over it. Thus, it is essential to list out how the intellectual property will be affected by way of transfer of the business to the other party. A sample clause could be: “The parties hereby agree that from the effective date:
- The seller shall use the intellectual property with respect to the [●] division only including but not limited to all rights, title and interest in the proprietary rights in relation to the online portal “[●]” and in relation to the brand name ‘[●]’ as used with respect to the [●] division only, and nowhere else which will likely conflict with the undertaking.
- The purchaser shall use the intellectual property with respect to the undertaking only including but not limited to all rights, title, and interest in the proprietary rights in relation to to the brand name ‘[●]’ as used with respect to the undertaking only, and nowhere else which will likely conflict with the service division.”
Conditions precedent and conditions subsequent- These clauses are extremely essential when it comes to a business transfer, as it lays down and clearly defines the conditions which are to be fulfilled by the parties before affecting the transfer of business under the agreement and after affecting transfer under the agreement as business are complex entities and a lot of their processes require legal compliance and also fulfillment of tax liabilities, therefore it is necessary to draft these clauses with utmost diligence. The conditions precedent and subsequent should be specific and not generic in nature. Further, additional conditions precedent and subsequent may have to be added on the basis of the outcome of the due diligence exercise, and in compliance with the laws.
Tax cooperation and allocation of taxes – Since tax is one of the major aspects which has to be regulated and looked into when undertaking a business transfer, it is essential to draft a clause in this respect specifying each party’s obligations with respect to tax liability. An example of this clause is:
- Exchange of information: Each party shall furnish or cause to be furnished to the other party, upon request, as promptly as practicable, such information and assistance relating to the business as is reasonably necessary for the filing of all tax returns, and the making of any decision in relation to taxes, the preparation for any audit by any tax authority, and the prosecution or defence of any claim, suit or proceeding relating to any tax return. Each party shall cooperate with the other party in the conduct of any audit or other proceeding relating to the taxes involving the business.
- Responsibility of seller: The seller is responsible for and shall indemnify the buyer against all taxes arising by reason of or attributable to the business or its operations, activities, and transactions prior to the closing date without regard to the actual time of payments, filing or assessments thereof except to the extent as expressly provided for in the audited closing accounts.
Employees – When the business is being transferred, it is important to lay down how the existing employees will be transferred and the procedures and details in this respect as this information are necessary for third parties like the employees to know of their rights and obligations when the business is taken over. It is also important to furnish the record of all the employees to the purchaser.
Confidentiality – Confidentiality is the most essential feature when it comes to any business transactions and especially business transfer, wherein two or more parties are engaged and the exchange of such information happens that in case of leak of this information in the open market, it may have detrimental effects to the business of the party whose information is leaked. Thus, confidentiality clauses are the most essential clauses to guard the interest of the parties and to keep their information protected. And under the business transfer agreement, along with the business, all the confidential information is also transferred thereby. In such a transfer it is important to protect the confidentiality of the information and this clause shall specify the same.
Indemnification –Indemnification means security against legal liability for other’s actions. The concept of Indemnity is embodied u/s 124 of the Indian Contract Act, 1872 which states that “a contract whereby one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called a contract of indemnity”. In a business transfer, it may be possible that the business brings along with it liabilities on assets and in the form of loans and other encumbrances. On transfer of business, the purchaser may be subjected to these liabilities, which he may not have known, thus an indemnity clause safeguards the interest of the purchaser in such circumstances and resolves to avoid future disputes in this regard. All possible situations of indemnity should be foreseen and incorporated under this clause. An example of this clause is:
- Seller’s indemnity: The seller shall be liable to indemnify, defend and hold harmless and shall keep indemnified, the buyer from and against any and all damages, penalties, costs, and expenses (including reasonable attorney’s fees and expenses) (collectively “damages”), incurred by the buyer resulting from claims, actions, demands, or assessments, [directly] by reason of any breach of any [seller’s warranties] or covenant of the seller contained in this agreement or any ancillary agreements.
- Purchasers indemnity: The purchaser hereby agrees to indemnify and hold the seller and its affiliates, directors, officers, employees, shareholders, members, partners, agents, attorneys, representatives, successors and assigns (collectively, the “seller indemnified parties”) harmless from and against, and pay to the applicable seller indemnified parties the amount of, any and all losses based upon, attributable to, arising out of, or in connection with, or resulting from (i) the undertaking or the assets or employees , taxes relating to any period prior to or after the effective date; and/or (ii) breach or failure of the representations or warranties made by the purchaser in this agreement; and/or (iii) breach of any covenant on the part of the purchaser under this agreement; and/or (iv) transactions contemplated under this agreement including but not limited to any tax liability arising pursuant to this agreement, usage of the name of the seller in any manner in relation to the undertaking after the effective date.
Term and termination – The term specifies the duration for which the agreement shall be in force and stand valid. The ‘termination clause’ is an important clause found in any form of legal agreement that allows for the agreement to be ended or terminated, under circumstances specified or breach of duties. The termination clause is typically placed along with the terms and conditions of the agreement and it is essential to draft the consequences of termination also.
Dispute resolution –This is an essential clause, as it defines that in case of any dispute arising in respect of the agreement, how the dispute would be settled and how the cost will be divided among the parties. Most parties prefer mediation or arbitration as a faster method to settle disputes. This clause is essential because imagine a situation, wherein a dispute with respect to the agreement has arisen, and in absence of this clause, one party wants to settle the dispute via mediation and the others via arbitration, then this will give rise to another dispute, thus making it a tedious, time and resource-consuming process for all the parties. If the parties choose for arbitration, it is essential to specify the seat and place of arbitration and the process of appointment of the arbitrator and his fees and who will be liable to pay the same.
Governing law and jurisdiction – This clause specifies under what laws will the agreement and any matter incidental thereto be governed by and where does the jurisdiction of the dispute lie. This becomes essential especially in cases of international entities.
FAQs
What is a Business Transfer Agreement (BTA)?
A Business Transfer Agreement (BTA) is a legal document that outlines the terms and conditions under which a business or a part of a business is transferred from one party to another. It includes details about the assets, liabilities, employees, contracts, and other elements involved in the transfer.
Why is a BTA important in India?
- Legal Clarity: It provides clear terms of transfer, reducing the risk of disputes.
- Asset Transfer: It ensures that all assets and liabilities are properly transferred.
- Regulatory Compliance: It helps in complying with various legal and regulatory requirements.
- Tax Implications: Proper documentation can optimize tax benefits and minimize liabilities.