What is a Slump Sale:

As per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer of one or more undertaking, by any means, for a lump sum consideration without values being assigned to the individual assets and liabilities in such transfer. In simpler terms, a slump sale is the sale of a division of a Company including all its assets and liabilities to another Company for a lump sum consideration.

As per Explanation 1 to section 2(19AA), ‘undertaking’ shall include any part of an undertaking or a unit or division of an undertaking or a business activity taken as a whole but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

The Slump sale consideration may be in the form of cash, shares, debentures, etc. To give effect to a slump sale where the consideration is cash, business transfer agreement needs to be executed between the Parties. A slump sale can also be concluded through a scheme of arrangement. We shall cover how a scheme of arrangement works in one of our next articles.

Constituents of a Slump Sale

Thus, for a transaction of to constitute a slump sale the following conditions need to be satisfied:

1. Transfer of one or more undertaking of a business entity.
2. The transfer may be through any means of transfer, i.e. sale, exchange, etc.
3. The whole or a part of the undertaking must constitute a business activity.
4. The undertaking must be transferred on a going-concern basis.
5. The transfer must be for a lump-sum consideration.
6. The item-wise value of assets and liabilities shall not be indicated in the consideration.

Slump Sale Vs. Asset Sale

A slump sale is different from an asset sale. Under a slump sale, a whole or a part of an undertaking constituting a business activity is sold. The sale of a single or multiple assets which do not constitute a business or transfer of a single liability does not constitute a slump sale. Further, a sale where values are assigned to each asset or liability being transferred in order to arrive at the consideration for sale of an undertaking shall not constitute a slump sale. Both these transactions involve transfer of assets and/or liabilities of a company it shall not be called a slump sale.

The choice between a slump sale and an asset transfer shall depend upon the circumstances of transfer. For instance, a slump sale may be preferrable to the seller as he may save on tax by paying long term capital gain tax instead of paying tax at a higher ordinary income tax rate. Similarly, an asset sale would be advantageous for a buyer as it will enable him to avail early depreciation benefits and avoid the acquisition of the transferor’s liabilities.

Further, under a slump sale the undertaking or a substantial part thereof is transferred on a “going concern” basis. That may not be the case in case of an asset sale.

Slump Sale process:

A slump sale can be affected either by

1. through a business transfer agreement; or
2. through a Scheme of Arrangement under section 230-232 of the Companies Act, 2013.

Each method has its own pros and cons. Various factors need to be considered while determining which method is appropriate in what case.

Business Transfer Agreement:

A slump sale is usually affected through a business transfer agreement (BTA). BTA is an agreement by which ownership in the asset and/or liabilities of a business undertaking or substantial part thereof is transferred on a going concern basis. It specifies the list of assets, liabilities, clients, contracts, employees, etc. that are being transferred as a result of such slump sale, the conditions precedent, representations, warranties, and the lumpsum consideration at which the transfer is being executed.

The BTA may be structured as an Agreement to sell or as a Conveyance deed. While the former lays down the intention of the parties to execute a slump sale at a future date or upon fulfilment of a particular condition; the latter itself consummates the sale. In case of agreement to sell the transfer does not take place immediately but only upon execution of definitive documents. Once prepared the BTA undergoes negotiations and hence takes around 1-2 months for being executed.

Following must be mentioned in a BTA:

1. Schedule of Assets;
2. Schedule of Liabilities;
3. Detail of creditors;
4. List of contracts;
5. List of employees;
6. Lump-sum consideration;
7. Detail of intellectual property;
8. Name of parties;
9. Address of parties;
10. Pending suits;
11. Requisite representations and warranties;
12. Closing date

Scheme of arrangement:

A slump sale can be affected by way of a scheme of arrangement under section 230-232 of the Companies Act, 2013. A scheme of arrangement is a procedure that allows a company to reconstruct its capital, assets or liabilities with the approval of its shareholders and the Court. Upon approval of the scheme of arrangement by NCLT, the slump sale shall take effect between the transferor and transferee.

Who should consider Scheme of Arrangement:

• Companies with large debts
• Companies needing to restructure
• Companies experiencing trading difficulties
• Companies under pressure from their creditors
• Companies wanting to avoid liquidation

Taxation aspects under a slump sale

The gain or loss resulting out of a slump sale shall be treated as capital gain/loss under Income Tax Act, 1961. The capital gain or loss will be either long-term or short-term depending upon the period for which the undertaking is held.

If the undertaking is held for more than 36 months, the resulting capital gain or loss shall be long-term and if it is held for less than 36 months, the resulting capital gain or loss shall be short term. Further, there will be no indexation benefit available in the computation of the capital gains.

GST and Slump sale:

As per Notification No.12/2017- Central Tax (Rate), services by way of transfer of going concern as a whole or part thereof is exempt from GST. Thus, transfer of a business as a going concern is exempt from GST.

Also, Schedule II of the CSGT Act excludes the transfer of a business as a going concern as the supply of goods but includes the transfer of business assets as the supply of goods.

Compliance under the Companies Act, 2013

Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the Board. One of the restrictions 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.’

Therefore, in case of slump sale, a special resolution of the members shall be required under section 180. For the purpose of section 180, ‘undertaking’ means an undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income.

Conclusion

A slump sale or an asset sale thus help a Company convert its assets into cash. Startups and Companies must choose wisely between the two to make the most of the transaction.