SLUMP SALE

Saturday Brain Storming Thought (273) 03/05/2025

SLUMP SALE

Slump Sale is one of the methods of business restructuring

Under this method, certain assets and liabilities are sold together for a lump sum sale consideration without determining the individual values of assets and liabilities sold

Key Takeaways of Slump Sale

1) 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

2) The consideration for a Slump Sale should be settled in lump sum only which can be in cash, exchange of shares, debentures, bonds etc

3) The scope of Slump Sale is wide and it covers situations like exchange, barter etc

4) Slump Sale is an effective and maybe the quickest strategy to undertake business transfer with assets and liabilities

5) Slump Sale is considered to be one of the most preferred ways of carrying out mergers and acquisition deals

6) Slump Sale has the least complex yet well defined tax implications along with other allied law procedures that are simple and time-efficient

Objectives of Slump Sale

1) To strengthen the performance of the business with efficient management strategies

2) To target and remove negative synergy and distinction between core and non-core operations

3) To attain tax and regulatory benefits

Compliances under the Companies Act 2013 for Slump Sale

1) Companies Act 2013 has a unique and extended definition of undertaking by defining threshold limit

2) “Undertaking” is defined as a unit/undertaking in which investment of the company exceeds 20% of its net worth or which generates 20% of the total income

3) In case of a Slump Sale, provisions of section 180 shall get attracted to any company other than a private company

4) Special resolution (with 75% approval) needs to be passed / approved in the general meeting of the company for undertaking the Slump Sale transaction

5) On passing the resolution successfully the board may authorize any person to finalise and execute on necessary documents including definitive agreements, business transfer agreements, deeds of assignment/conveyance and other ancillary documents

6) Form MGT-14 along with resolution and notice given under section 102 must be filed with the ROC within 30 days along with the prescribed fees based on share capital

7) If the above undertaking criteria is not satisfied, then there is no need of passing special resolution

Compliances under Income Tax Act, 1961 for Slump Sale

1) Transaction of Slump Sale is taxable as capital gain as per provisions of section 50B of Income Tax Act, 1961

2) The gain or loss resulting out of a Slump Sale shall be considered as capital gain/loss under the Income Tax Act in the manner prescribed below

1) Full value of consideration – XXX

2) Less : Expenses in relation to transfer – XX

3) Net Consideration – XXX

4) Less : Net worth of undertaking – XX

5) Short/Long term capital gain/loss – XXX

In computing the net worth of the entity points to be considered

1) The value of net worth should not take into account any revalued figures of asset and liability

2) The written down value of assets shall be considered in case of depreciable assets under the Income Tax Act

3) The value of assets will not be considered on which 100% deduction has been allowed u/s 35AD (specified business)

4) The value as appearing in the books of accounts shall be considered in case of any other asset

After considering the above points, the cost of acquisition shall be taken as Nil for the purpose of computation of capital gains, in case the resulting net worth is negative

Income Tax provisions for Slump Sale

1) If the Undertaking is held for more than 36 months – Long term and if less than 36 months – Short term

2) There will be no indexation benefit available in the computation of the capital gains

3) Short Term Capital Gain : Normal rates of taxation

4) Long Term Capital Gain : 20%

5) Reporting formality : The Company has to furnish a report by a CA as per form 3CEA

6) Taxation under GST : The basis of taxation under GST Act revolves around supply

A Slump Sale would also be a supply and hence fall under the purview of GST

The supply would be in the nature of transfer as a going concern, and such a transfer attracts nil rate of GST

Transfer as a going concern

It would roughly mean that the current business as a whole will be carried on by a different person or that there is a change in the ownership of the business

Key points for Slump Sale

1) The transferee ends up buying the whole of the business undertaking

2) Valuation is not done for individual component or assets but is done only for the whole of the business undertaking/asset

3) The rights and liabilities of the assets are transferred to the transferee

4) The tax incentives/tax holidays and benefits of the existing business can be transferred to the new owner

5) GST will not be applicable if transferred on going concern basis

6) Transfer of any depreciable asset under Slump Sale can attract long term capital gain of 20% if undertaking is more than 3 years

7) Provisions of section 50C as regard to stamp duty in case of land and building does not apply

8) Provisions of gift tax u/s 56(2) does not arise for Slump Sale transaction

Overview about Slump Sale

1) Slump Sale is one of the forms of Corporate Restructuring

2) It is the process of transferring whole or part of the undertaking of the business as a going concern for a lump sum consideration

3) It is generally carried out by any company that intends to hive off its loss making division so that it shall focus on the core value adding business

4) Slump Sale can be regarded as a scheme of arrangement under Companies Act, 2013

5) Also, specific provisions are applicable for Slump Sale vide section 180 of the Act

Undertaking

It shall mean an undertaking in which the investment of the Company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year

An undertaking which generates 20% of the total income of the Company during the previous financial year

Net Worth [Section 2(57)]

Add

1) Paid up share capital

2) All reserves created out of profit

3) Securities Premium account

4) Credit balance of P&L account

Less

1) Accumulated losses

2) Deferred and miscellaneous expenditure not written off

3) Debit balance of P&L account

It excludes revaluation reserves, write babk of depreciation and amalgamation

Substantially the whole of the undertaking

It shall mean

20% or more of the value of the undertaking as per the audited balance sheet of the preceding financial year

Sections primarily dealing with Slump Sale as per Companies Act, 2013

1) Section 180

Restrictions on Powers of Board

2) Section 232

Merger and amalgamation of Companies

3) Section 233

Merger or amalgamation of Certain Companies (Fast Track Merger)

The above mentioned sections are directly related to Slump Sale

Section 180(1) of the Companies Act, 2013

1) The Board of Directors of a Company shall not sell, lease or otherwise dispose of

2) 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

3) Unless consent from the members is obtained by way of passing special resolution in the general meeting

Section 180(4) of the Companies Act, 2013

1) Any special resolution passed by the Company consenting to the Slump Sale transaction specified in Section 180(1)(a) may stipulate the following conditions

2) Conditions regarding the use, disposal or investment of the sale proceeds which may result from the Slump Sale transactions of such conditions as may be specified in such resolution

3) In case Company wants to reduce its share capital after transfer of undertaking, it has to follow provisions prescribed under Section 66 of the Act

4) This subsection shall not be deemed to authorise the Company for the same

Special Resolution to be passed through postal ballot

Provision for Slump Sale specified under Section 180(1)(a) of the Act shall be approved by the members by means of voting through postal ballots (Section 110 read with Rule 22(16)(i)]

Voting through PostaL Ballot

1) It means by post or through any electronic mode

2) One Person Companies and other companies having members upto 200 are not required to transact any business through postal ballot

Section 232 and 233 of the Companies Act, 2013

1) Slump Sale transaction can also be carried out by a Company through a scheme of merger or amalgamation under section 232 of the Act

2) While carrying out the scheme of merger or amalgamation under Section 232 of the Act, provisions of Section 230 of the Act (compromise or arrangement) shall also be compiled with

3) Provisions of Fast Track Merger under Section 233 of the Act can also be opted by eligible Companies specified under that Section for the Slump Sale transaction

Caveats

1) MOA of both transferor and transferee Company should contain the power to sell or acquire undertaking respectively in their object clause

2) Slump Sale agreement / Business Transfer Agreement should be entered into between both the parties of Slump Sale

3) Income Tax implications pertaining to Slump Sale to be considered

Non-applicability of the Provisions

The provisions of Section 180(1)(a) shall not apply in the following cases

1) In case of Private Limited Company

2) In case of Sorcified IFSC Public Company, if the ADA of such Company provides otherwise

3) Sale or lease of any property of the Company where the ordinary business of the Company consists of or comprises, such selling or leasing

4) The title of a buyer or other person who buys or takes on lease any property, investment or undertaking as specified in Section 180(1)(a), in good faith, shall not be affected by that provision

Special Compliance

1) Board Resolution

A) Notice convening Board Meeting should be issued 7 days before the date of the meeting

B) Consent of the requisite majority of the Board to be obtained in the meeting for approving the Slump Sale transaction

C) File Form MGT-14 for passing Board Resolution (not applicable in case pf private limited companies and Specified IFSC Public Companies)

2) Members Resolution

A) 21 clear days notice should be issued for convening Members Meeting or alternatively shorter notice shall be issued

B) Pass special resolution in members meeting, approving the Slump Sale transaction either at the meeting or by means of voting through postal ballot (as applicable)

C) Flie Form MGT-14 within 30 days of passing special resolution (60 days in case of Sorcified IFSC private or public Companies)

Other secretorial compliances pertaining to Slump Sale transaction under Sections 230/232/233 shall also apply accordingly, if opted