What are business transfer agreements

Saptaswara Chakraborty| North Eastern Hill University| 17th June 2020 

Introduction

For any merger and an acquisition, it is important to note that such a transfer requires how such a transfer is acquired along with what has been acquired. Such a structural transaction is what makes or breaks the deal. While preparing for a transfer, it is pertinent to have such provisions in future that can outweigh the things compromised to that of the transactions. While selecting the mode of an acquisition, it has the capability and far-reaching implications for both the buyer and the seller. Various factors involving both the seller as well as the buyer may be involved, including the successor liability, legal compliance, taxation as well as stamp duty.

There are various means through which an entity may be acquired, including some only picking up the required assets which would be beneficial for the company while the other may be acquired. There are various reasons for which a company may decide to transfer one or more of its business lines, including lack of profit, requiring management and specialisation to cater to such requirements.

What are business transfer agreements and what constitutes such kind of an 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.

Structuring of a business transfer agreement

The important condition for and agreements; essentially, a business transfer agreement is its structure. Following are the two ways how it can be done. They are:

• It is structured as an agreement to sell wherein the manner in which such an understanding is to be sold is hence laid down. Such an agreement in itself does not result in any immediate transfer of the undertaking.
• Secondly, the Business Transfer Agreement is the one where the BTA itself causes the sale of such an undertaking and payment or consideration thereof.

Conclusion

The Business Transfer Agreement is essentially one that requires a lot of thinking. Such a process may seem to be easy but involves a lot of complexities. Different laws and other legal mechanisms may be involved in such a process, and therefore such mechanisms need to be taken care of while undergoing through merger and acquisitions. A company may go through a BTA during various circumstances depending on his need and in the same way, the buyer may resort to certain assets or may take up the entire business.

In this article, major emphasis has been given in understanding what a Business Transfer Agreement is and what are the factors that are responsible for it.