Decoding Slump Sale: Merger Implications under Companies Act & Income Tax Act

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.

The consideration for a slump sale should be settled in lump sum only which can be in cash, exchange of shares, debentures, bonds etc. The scope of slump sale is wide, and it covers situations like exchange, barter etc.

1. Relevant Sections

• Under the Companies Act, 2013: Section 180(1)(a)
• Under the Income Tax Act, 1961: Sections 2(42C) & 50B

2. Definition

• Companies Act, 2013: Slump sale is not explicitly defined.
• Income Tax Act, 1961: Slump sale is defined as 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, except for specific purposes like stamp duty, registration fees, or taxes.

3. Capital Gain Provisions

• Companies Act, 2013: No provisions regarding capital gains.
• Income Tax Act, 1961: Capital gains from a slump sale are taxable in the year of the sale. The nature of capital gain depends on the holding period of the transferred undertaking. Profit under the business head (PGBP) does not arise in a slump sale. Capital Gain = Slump sale consideration - Net worth of the undertaking, with specific rules for asset valuation and deductions.

4. Resolution Required

• Companies Act, 2013: Special resolution required under Section 180(1)(a), except for private companies, which are exempted.
• Income Tax Act, 1961: No specific resolution requirement.

5. Stamp Duty

• Companies Act, 2013: Stamp duty payable on the Business Transfer Agreement (BTA).
• Income Tax Act, 1961: Not applicable.

6. Compliances under Companies Act, 2013

For Transferor Company

• Ensure the MOA allows the sale of the undertaking/business.
• Provide audited balance sheets of the preceding year.
• Determine the slump sale consideration and its payment mode.
• Draft the Slump Sale Agreement, considering Income Tax and Stamp Duty provisions.

For Transferee Company

• Check if the MOA permits carrying on the acquired business.

Difference between Individual asset sale and slump sale

Note:

A slump sale can also be executed through a scheme of arrangement under Sections 230-232 of the Companies Act, 2013, involving the following necessary approvals:

• Approval from the National Company Law Tribunal (NCLT).
• Consent from the Regional Director.
• Clearance from Income Tax Authorities.
• Sanction from the Registrar of Companies.
• Consent of Shareholders.
• Agreement from Creditors.
• Authorization from the Board of Directors of the transferor entity.

Scheme of arrangement (under section 230-232)

Scheme of Arrangement is a pre-approved agreement between a company and its shareholders. It can be used for a solvent as well as insolvent restructuring of a company. A slump sale can be effected by a scheme of arrangement under section 230-232 of the Companies Act, 2013.

Section 230 of the Companies Act, 2013 talks about compromise, arrangement and amalgamation including takeover (sub-sections (11) and (12) have been notified on February 03, 2020). According to this section a company may file an application under section 230(1) with NCLT for any compromise, arrangement or takeover along with supporting documents such as material facts, reduction of share capital, consent of creditors (75%) and other required disclosures. On receiving such an application, the NCLT shall order a meeting for all the shareholders and creditors of the company.

Process

A draft scheme of arrangement shall be prepared for getting an approval in the board meeting. An application shall be filed under section 230(1) with the NCLT in form no. NCLT-1.

Application for Arrangement

An application shall be filed for sale and transfer of an undertaking as a going concern on a lump sum basis. Such an application shall be accompanied with the relevant documents mentioned under Rule 3 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

Directions for Meeting by NCLT

Upon hearing of the application, NCLT shall give such directions in determining the class of creditors whose meetings have to be held for considering the proposed arrangement.

The Tribunal may also give directions in the following matters

• Time and place of the meeting.
• Appointing a Chairperson and scrutinizer for the meeting to be held along with terms of his appointment.
• Fixing the quorum and the procedure to be followed at the meeting along with voting in person or by proxy or by postal ballot or by voting through electronic means.
• Determining the values of creditors of any class whose meetings have to be held. e. Notice to be given of the meeting and advertisement of such notice.
• Notice to be given to sectoral regulators or authorities such as income tax authorities, Reserve Bank of India, Securities and Exchange Board of India and other sectoral regulators or authorities which may be affected by the arrangement and shall require representations within thirty days from the date of receipt of such notice. However, if no representations are received it shall be presumed that such authorities have no representations to make on the proposal.
• The time within which the chairperson of the meeting is required to report the result of the meeting.

Notice of the meeting

The notice of such a meeting in Form No. CAA.2 shall be sent to all the members, creditors and the debenture holders of the company individually at the address registered with the company at least one month before the date fixed for the meeting.

Communication of the notice

The notice shall be sent by either:

• The Chairperson appointed for the meeting;
• The company;
• Any other person as Tribunal may direct.

The notice shall be sent through the following modes:

• Registered post, speed post or courier;
• Email or hand delivery;
• Any other mode as Tribunal may direct.

Accompanying documents to the notice

The notice of the meeting shall be accompanied by a copy of the proposed scheme of arrangement and a statement disclosing the following details of the arrangement

Details of the order of the Tribunal:

• Date of the Order;
• Date and hour along with the Place of the meeting.

Following details of the company are required to be sent along with the notice of the meeting:

• Corporate Identification Number or Global Location Number of the company. b. Permanent Account Number.
• Name of the Company.
• Incorporation date of the Company.
• Type of the Company.
• Address of Registered office and Email Address.
• Summary of main object according to the MOA and main business carried on by the company.
• Details about change of name, registered office and objects of the company within the last five years.
• If the company is a listed company then the name of the stock exchange(s) where securities of the company are listed.
• Details of the capital structure of the company along with authorised, issued, subscribed and paid-up share capital.
• Names and address of the promoters and directors.

Petition for confirming the scheme

When the proposed scheme of arrangement is agreed to by the members of the meeting, the company shall present a petition to the Tribunal within seven days of the filing of report by the Chairperson in Form No. CAA.5 for sanction of the scheme.

On receipt of such petition, NCLT shall fix a date for hearing of the petition. A notice for the same shall be advertised in the same newspapers in which the notice of the meeting was advertised at least ten days before the date fixed for the hearing and a copy would be sent to the objectors.

NCLT shall sanction the scheme in Form No- CAA 6. The order for sanction shall be filed with the Registrar of Companies within 30 days in e-form INC 28.

On sanctioning the scheme, section 231 empowers the Tribunal to supervise the implementation of such scheme. The Tribunal may also make any modifications in the arrangement that it may consider necessary for the proper implementation of the arrangement.

Where an order has been made under section 232(1) of the Companies Act, 2013, the merging companies or the companies in respect of which a division is proposed shall be required to circulate the following documents for the meeting ordered by the Tribunal:

a. The draft scheme of arrangement adopted by the directors of the merging company.

b. Confirmation that a copy of the draft scheme has been filed with the Registrar.

c. A report by the directors of the merging companies explaining the effect of the scheme on each class of shareholders, key managerial personnel, promoters, non-promoter shareholders laying out, in particular, the share exchange ratio.

d. Expert report with regard to valuation.

e. A supplementary accounting statement if the last annual accounts of any of the merging companies relate to a financial year ending more than six months before the first meeting of the company occurred for approving the scheme.

The Tribunal, after the procedure in section 232(1) and 232(2) have been complied with, by order, may make provisions on certain matters.

An order under section 232 read with section 230 of the Companies Act, 2013 shall be in Form No. CAA.7 with such variation as required.

The transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties, the allotment by the transferee company of any shares, debentures, in the company which are to be allotted by that company under the scheme of arrangement, the transfer of the employees of the transferor company to the transferee company and such other matters as mentioned in section 232(3) of Companies Act, 2013.

Till the scheme is fully implemented, every company shall file a statement of compliance with the Registrar of Companies in Form No. CAA.8 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014 within two hundred and ten days from the end of financial year.