Restructuring of business is a lengthy and complicated process be it financial, technological or organizational by either merger, amalgamation, arrangement, compromise, demerger, acquisition, takeover, strategic alliance or slump sale and so on.
Business Transfer Agreement is an agreement between transferor and transferee company to execute a slump sale where every asset and liability of one or more unit transfer, sell, lease or assign to another for lump sum consideration. It is a type of agreement to get ownership of other businesses.
Under the Income Tax Act, 1961, the slump sale is 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 and liabilities in such sales.
The purposes for which businesses are restructured through slump sale are as under:
- For the betterment of growth of the business
- Reach out to better profits.
- Restructuring through slump sale attracts only stamp duty on immovable properties.
- The transferor has to pay capital gain arising from such transfer
- The value will be assigned to the business assets and liabilities being acquired
The Business Transfer Agreement is a very crucial document for completing business transactions due to the following reasons:
- 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.
Following are the contents which need to be mandatorily disclosed in the Business Transfer Agreement:
- Schedule of Assets
- Schedule of Liabilities
- Detail of creditors
- List of contracts
- List of employees
- Lump-sum consideration
- Detail of intellectual property
- Name of parties
- Address of parties
- Pending suits & cases under any authority
- Closing date
- Such clauses may be deemed fit.
Following are the element which is essential and need in-depth disclosure regarding such slump sale transact before executing the Business Transfer Agreement are as follows:
- Sale of any part of an undertaking
- Transfer of undertaking on a going concern basis
- Payment for such transfer should be in lump sum consideration
- Transfer assets & liabilities of that undertaking which will be transferred
Modes of execution of Business Transfer Agreement
There are two modes in which BTA can be formed which are mentioned under:
- Agreement to sell: It is an indication of intent but does not result in any immediate transfer of the undertaking. In this mode, parties have agreed for such transfer through an agreement but the actual transfer will only come into effect from executing the separate agreement.
- Deed of conveyance: Deed that leads to the sale of the business undertaking and payment of consideration for the undertaking. In this document, parties agree to transfer the undertaking and actually effect of such transfer of undertaking.
The different ways of restructuring/rearrangement of entities may create confusion and so much chaos for the parties to the transaction but slump sale is a way out from this problem as it is not so lengthy procedure with fewer compliances and saves the time and cost of the business owners.
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Also Read: Money Transfer Service Scheme