Transferring Assets of a Company

Introduction:

The term “asset” is not defined under the Companies Act, 2013.

It is, however, defined in the Black’s Law Dictionary as:

The word, though more generally used to denote everything which comes to the representatives of a deceased person, yet is by no means confined to that use, but has come to signify everything which can be made available for the payment of debts, whether belonging to the estate of a deceased person or not. Hence we speak of the assets of a bank or other monied corporation, the assets of an insolvent debtor, and the assets of an individual or private co-partnership. [1]

The transfer of an asset is generally carried out for the purpose of keeping the business afloat or for the purposes of mergers and amalgamations or different businesses.

Transferring assets is a rather precarious task. If performed erroneously, the legal and tax consequences are inexorable. The reason behind the transfer holds an important place and should be treated as such. The decision should be made cautiously, keeping in mind the consequences. For example, if the company transferring its assets is going through insolvency, the transfer can be construed as a shot at obstructing the claims process of a creditor.

Methods of Transfer

There are numerous methods that can be opted for the transfer of assets. However, this has to be done keeping in mind the following factors:

1. Type of company
2. Type of asset in question
3. The financial state of the company
4. Consideration in return for the asset.

The following are some of the most common ways for a company to transfer its assets:

Slump Sale

Slump sale is essentially a method of corporate restructuring. The mode of transfer has to be a “sale”. The entire undertaking is sold off in a single transaction and the assets’ overall valuation is calculated. After the undertaking is sold, the business entity can continue its operations on a “going concern” basis. “Going concern” means that the business entity possesses the required asset, capital, and other resources to continue operations indefinitely. If an entity is not a going concern anymore, it means that the company is insolvent/bankrupt and has liquidated its assets.

Section 2(42C) of Income-tax Act, 1961 states that ‘slump sale’ means 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 in such sales.

In the case of CIT v Artex Manufacturing Company Pvt. Ltd[2], the Apex Court held that for a sale to constitute slump sale, there must be a sale ongoing concern basis in its entirety and the individual items cannot be divided in respect of the whole consideration. 

The following are some of the benefits of a Slump Sale:

1. For the purpose of improving the business performance;
2. For improving the focus and eliminating negative synergy and promote strategic investment;
3. For availing the tax benefits that are associated with the sale.

In Avaya Global Connect Ltd. v ACIT[3], the court held that any kind of transfer of an undertaking other than as a result of a sale will not be construed as a slump sale.

Capital Contribution

Capital Contribution essentially means bringing in capital into the company in the manner of assets or cash. In exchange for equity, a capital contribution is given to the company in the form of an asset. The capital contributor, as a result, then owns equity in the company and is known as a shareholder. There exist two types of capital contributions – equity investment and debt investment.

When an investor has equity in the company, he has a stake in the profit as well as the loss of the company. The more a person has invested the more return he receives in the form of profits. Debt investment is a loan of sorts. In this case, the company loans the money from the lender. The lender will not have any decision making power in the affairs of the company.

Sale & Purchase

Sale & Purchase is the easiest method for the transfer of assets. This is because it involves a simple transaction wherein the buyer pays a fixed consideration amount in exchange for the asset. A major dissimilarity between the capital contribution method and sale and purchase method is that the former creates an equity right in the company while the latter does not.

Sale and purchase is the most common way of transferring assets, especially in small enterprises. This method is undertaken for several reasons. For example, when a company is declared insolvent, it needs liquidity to pay their debts. To receive that liquidity, assets are sold in exchange for consideration, i.e., money. Another case is when a company wants to upgrade its technology they sell of their current assets.

Asset Acquisition

In this case, the buyer has the opportunity to choose the asset he wants to purchase. There exists no such liability on the buyer that he has to purchase all the assets of a company. They are purchased from the company by the buyer in exchange for consideration. The valuation of the assets is carried out individually and the amount is paid by the buyer to the company transferring the asset. There is a mutual agreement between the acquirer and the company as to the transfer of the rights and liabilities of the assets. As per the consensus, the rights and liabilities of the asset may or may not be vested in the acquirer upon transfer of the asset.

Conclusion

For a company to sustain, it is essential that the assets of the company are more in number than the liabilities. This ensures the continuity of the company. Transfer of assets is done for multiple reasons, such as mergers, amalgamations, corporate restructuring, etc. It is to be noted that several factors are to be kept in mind while transferring the assets to ensure a smooth transition. Some of these factors include the kind of asset, its valuation, location, etc.

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References:

[1] Black’s Law Dictionary, 4^th Edition

[2]  [1997] 227 ITR 260 (SC)

[3] (2008) 26 SOT 397 (Mum)