Agreement for Assignment of Business undertaking as a going concern

One of the modes of transfer of a Business Undertaking is by way of a contract between the parties. In brief, I may mention that following considerations may be taken into account before entering into any such transaction:–

1. As a matter of procedure under the Company Law, first an agreement has to be entered into by the concerned parties, thereafter, on the basis of the agreement, the Vendor company has to obtain the consent of its shareholders, under section 293(1)(a) of the Companies Act, 1956 by way of a resolution passed in the general meeting.
    

2. After getting the said consent of the shareholders actual conveyance may be executed in respect of immovable property which shall be liable to a levy of stamp duty at the respective rates as applicable in the concerned state. Movable property may be transferred by delivery of possession and hence levy of stamp duty may be avoided to that extent. However, one will have to take into consideration the impact of the decision of the Supreme Court in the case of Duncans Industries Ltd. vs. State of U. P. and Ors. (2000) 1 SCC 633 where plant and machinery embedded to earth was regarded as transferred under the conveyance and hence liable to stamp duty.
    

3. The High Court at Bombay, has held in Li Taka Pharmaceuticals vs. State of Maharashtra (1996) 8 SCL 102 that, when business was transferred as a going concern what is transferred is assets minus liabilities but not assets and liabilities separately.
    

4. In a sales tax matter, the Supreme Court had held that the transactions entered by a dealer in connection with closure of trade is not in the course of business and is hence not liable to sales tax (see, State of Gujarat vs. Raipur Manufacturing Co. Ltd.19 S.T.C. 1.) However, appropriate amendments have been made in Sec. 2(5A) of Bombay Sales Tax Act, 1959 so as to make the same chargeable to tax. Hence, sale of movable property shall be liable to the levy of sales tax.
    

5. With a view to rationalize the law relating to business restructuring, certain amendments have been carried out in Income-tax Act, 1961 (the Act), legal effects of the same may be summarized as follows-

   1. ‘slump sale’ has been defined by section 2(42C) of the Act

   2. Under section 50B of the Act the profits or gains arising on transfer by way of slump sale is chargeable to capital gains as short-term/long-term capital gains depending upon the period of holding in the previous year in which the transfer takes place. For the purpose of computing the capital gains, ‘net worth’ of the undertaking or division is deemed to be the cost of acquisition and cost of improvement and no indexation is available on the same.

   3. The Transferor company is required to reduce the written down value of its block of assets on account of slump sale in the manner provided in section 43(6)(c)(i)(C) of the Act.

   4. General provisions relating to actual cost and written down value would apply to assets acquired by the Transferee company as no specific provision has been made with respect to the same.

   5. Various other provisions in the Act specifically dealing with the situation of slump sale which are not specifically an issue of this article will also have to be taken into consideration.
       

6. The Supreme Court has taken a view in Western States Trading Co. (P.) Ltd. vs. CIT 80 ITR 21 (SC) that by means of an agreement of an even date it was not possible to alter the actual state of affairs; i.e., retrospective effect cannot be given by an agreement, this view has been followed by the Bombay High Court in Evans Fraser and Co. Ltd. vs. CIT 137 ITR 493 (Bom.)
    

7. The Supreme Court has recently in the case of Dalmia Cement Ltd. vs. CIT 237 ITR 617 (SC) held that profits of the business may be diverted to the purchaser even before the actual transfer of the business. The facts of the case were that, an agreement to transfer two cement factories had been entered into on 24th July, 1962. Under the terms of the agreement though the factories were to get transferred on a later date i.e., on obtaining all statutory approvals, the profits of the business were transferred from the date of the agreement itself. The court has held that, profits of a business do not accrue from day to day but at the end of accounting year and as, on the date of ascertaining the profits, the property had been transferred the profits will accrue to the purchaser.

This Sale and Purchase Agreement ("the agreement") is made at Mumbai this ______ day of ________ between A Ltd. a company incorporated under the Companies Act, 1956 and having its registered office at __________________________________________ hereinafter referred to as "the Vendor" (which expression shall unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and permitted assigns) of the One Part and
X Ltd. a company incorporated under the Companies Act, 1956 and having its registered office at ______________________________________________ hereinafter referred to as "the Purchaser" (which expression shall unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and permitted assigns) of the Other part.

1. The Vendor, is inter alia engaged in the pharmaceutical business through its undertaking situate at _____________________________________________ (the said undertaking).

2. The Purchaser is engaged in the pharmaceutical business for the last several years. It is in the process of expanding and developing its business and is currently considering purchase of the said undertaking of the Vendor.

3. The Vendor has agreed to sell and the Purchaser has agreed to purchase and acquire the said undertaking as a going concern on the terms and conditions mentioned hereinafter.

NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED TO BY AND BETWEEN THE PARTIES AS FOLLOWS:

1. In this agreement, unless the context otherwise requires the following expressions shall have the following meanings:

   1. ‘Closing’ shall mean the consummation of the transactions set forth herein.

   2. ‘Closing date’ shall subject to the condition precedent of the obligation to close by either parties mean one minute past midnight of _____ day of __________ or such other day being 15th or last day of a month thereafter so that a preparatory period of at least 15 clear days prior to the closing is provided.

   3. ‘Undertaking’ means all the operations and activities of the pharmaceutical business including the factory premises situate at _____________________, plant and machinery, furniture and fixtures, stocks, debts, intangible assets in the form of know-how, copyrights, trademarks and licenses, the benefits of all contracts entered into with or orders and all liabilities referable to the said pharmaceutical business.
       

2. Subject to the terms and conditions of this agreement, on the closing date the Vendor shall sell, convey, assign, transfer, and deliver to the Purchaser, and the Purchaser shall purchase and acquire from the Vendor, the undertaking as a going concern for a lump sum consideration of Rs.__________. The Purchaser agrees to discharge the consideration in the following manner –

   1. Rs. ________ in cash, immediately on the entering into of this agreement and the balance of,

   2. Rs. _________, on actual transfer of the undertaking by issue of its equity shares to the Vendor or to such persons as the Vendor may direct, which shares shall be treated as fully paid-up.
       

3. The Vendor hereby represents and warrants to the Purchaser that –

   1. The Vendor is a company duly organized, validly existing and in good standing under the laws of the Republic of India and has full corporate power and lawful authority to own, lease and operate its assets and properties and to carry on the business of the said undertaking.
       

   2. The Vendor under its Memorandum of Association has the necessary rights and powers to sell, transfer or convey the business of the undertaking in consideration for cash or shares or debentures or such other securities as the company may approve and that there is no prohibition whatsoever on it to transfer the said undertaking. This agreement is being executed by Mr. ____________________ as Executive Director of the Vendor who is duly authorized by its Board of directors to enter into this agreement and this agreement is a valid and binding obligation of the Vendor enforceable in accordance with its terms.
       

   3. The Vendor has complied with and agrees to comply with all the legal formalities under the relevant statutes for the time being in force in so far as they relate to transfer of the said undertaking.
       

   4. To the extent that such action has had or may have an effect whatsoever on the said undertaking or may result in any liability of Purchaser the Vendor has paid or caused to be paid, or provided for, all Central, State, municipal, local, foreign or other taxes, levies, cesses, and other statutory charges including without limitation, income-tax, customs and excise, sales tax, stamp duties or other additions to such taxes and interest, fines and penalties thereon, other than those taxes being contested in good faith and described in Schedule ______ hereto. Further, the Vendor has in accordance with the applicable law timely filed all tax returns required to be filed which correctly and accurately reflects the amount of its tax liability for such period and other required information.
       

   5. The Vendor is not in violation of any order, judgment, injunction, award or decree passed against it concerning the said undertaking or in violation of any Central, State, regional, foreign or local law, ordinance or regulation of any governmental or regulatory body applicable to the conduct of the business of the undertaking or the operating or use of the assets of the said undertaking,.
       

   6. The execution, delivery and performance of this Agreement and the consummation of the transaction contemplated hereby will not

      1. violate any provisions of the Memorandum of Association or Articles of Association of the Vendor;

      2. violate any order, judgement, injunction, award or decree of any court, arbitrator or governmental or regulatory body against, or binding upon, the Vendor or its properties, assets or business;

      3. violate any statutes, law or regulation of any jurisdiction as such statute, law or regulation relates to the Vendor or its properties, assets or business;

      4. violate any permit/license;

      5. require the approval or consent of any central, state, local or other governmental or regulatory body or the approval or consent of any other person.
          

   7. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, governmental or regulatory body or arbitration Tribunal against or involving the Vendor relating to or affecting the said undertaking. There are no actions, suits or claims, or legal administrative or arbitration proceedings, to the best of its knowledge pending or, threatened against or involving the Vendor and/or relating to or affecting the said undertaking.
       

   8. Schedule ______ sets forth all of the following contracts and other agreements to which the Vendor is a party and which relates to the said undertaking or to which the said undertaking may be bound or subject:

      1. contracts and other agreements with any current or former officer, director, shareholder and other agreements for the payment of fees or other consideration to any entity in which any officer or director of the Vendor has any interest;

      2. contract and other agreements with any labour union, association representing any employee of the Vendor or otherwise providing for any form of collective bargaining;

      3. contracts and other agreements for the purchase or sale of materials, supplies, equipment, merchandise or services that contain an escalation, renegotiation or redetermination clause or that obligate the Vendor to purchase all or substantially all of its requirements of a particular product from a supplier or for periodic minimum purchases of a particular product from a supplier;

      4. contracts and other agreements for the sale of any of the assets or properties of the said undertaking other than in the ordinary course of business or for the grant to any person of any options, rights of first refusal, or preferential or similar rights to purchase any of such assets or properties;

      5. partnership or joint venture agreements;

      6. contracts or other agreements whereunder the Vendor agrees to indemnify any party or to share the tax liability or any other liability of any party;

      7. contracts and other agreements that cannot by their terms be cancelled by the Vendor (or any successor or assignee of the Vendor) without liability, premium or penalty.
         There have been delivered to the Purchaser true and complete copies of all of the contracts and other agreements which are valid, subsisting, in full force and effect, binding upon the Vendor, and to the best knowledge of the Vendor binding upon the other parties thereto in accordance with their terms, and the Vendor has paid in full or accrued all amounts now due thereunder and has satisfied in full or provided for all of its liabilities and obligations thereunder which are presently required to be satisfied or provided for, and is not in default under any of them, nor to the best of its Knowledge, is party to any other contract or agreement or in default there under.
          

   9. All the properties including all movable and immovable properties, tangible and intangible properties of the said undertaking are absolute properties of the Vendor and are held free from all encumbrances save and except ________________ and the Vendor has a good and marketable title to the same.
       

   10. The Vendor has not defaulted in payments to any of the employees (including contract labour) or consultants of the said undertaking or to any regulatory authorities for any wages, salaries, commissions, bonuses, ESI dues, provident fund dues, other statutory dues, retirement benefits or other direct compensation or benefits for any services performed by them to the date hereof or amounts required to be reimbursed to such employees.
        

   11. All documents and other papers delivered by or on behalf of the Vendor in connection with this agreement and the transactions contemplated hereby or thereby are true, complete and authentic. No representation or warranty of the Vendor or as contained in this agreement contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements made not false or misleading. There is no fact know to the Vendor that has not been disclosed to the Purchaser in this agreement or the Schedules hereto that materially adversely affects, or is likely to materially adversely affect the said undertaking.
        

4. The Purchaser represents and warrants to the Vendor as follows:

   1. The Purchaser is a duly organized company, validly existing and in good standing under the laws of the Republic of India, and has the corporate power to purchase and acquire and own, lease and operate assets, properties and business and to carry on its business as now being and as heretofore conducted.
       

   2. The Purchaser has the corporate power to enter into, execute and deliver this agreement and to perform fully its obligations.
       

   3. The purchaser has carried out legal and financial due diligence in respect of the said undertaking and taken inspection of all assets and liabilities of the undertaking and collected all information which includes but not limited to the following:

      1. Reports and documentation of title for all portions of the said undertaking;

      2. Copies of all leases, sub-leases and ground leases relating to any portion of the said undertaking, including any guarantee agreements, executed in connection with such leases and subleases;

      3. Current and three years of historical operating reports with supporting financial documentation for all portions of the said undertaking, including but not limited to, accounting reports, copies of Audited Balance Sheets and Auditor’s Reports, bank statements for the past 24 months, audited statements, environmental reports, details of capital expenditure and engineering studies;

      4. Copies of all governmental and other approvals, licences (as well as all other documentation) obtained by the Vendor;

      5. Evidence of compliance with zoning, local restrictions, and building permits for all portions of the said undertaking;

      6. Information pertaining to any pending or threatened litigation involving any portion of the said undertaking;

      7. All service and maintenance contracts, employment agreements, collective bargaining agreements, equipment leases, utility agreements, management agreements, ground leases(if any), and other agreements relating to, or affecting any portion of the said undertaking;

      8. Personal property inventory of the said undertaking;

      9. Copies of any pending agreements that will be binding upon the Purchaser after closing;

      10. All copies of insurance policies relating to the said undertaking;

      11. And such other information and documentation reasonably requested for by the Purchaser and shall not raise any objection of any or whatsoever nature either as regards their physical condition or their title.
           

5. The said undertaking shall be transferred by the Vendor to the Purchaser on getting the following clearances –

   1. Vendor shall obtain the consent of its shareholders

   2. Vendor shall obtain clearance for the said transaction from the Income-tax authorities

   3. Vendor shall obtain urban land ceiling permission concerning parts of land.

   4. Vendor shall obtain necessary consent from its lenders for transfer of the loan facilities and the said undertaking.
       

6. The Purchaser agrees that it shall takeover the employees of the said undertaking on the following terms and conditions –

   1. the service of the employees shall not be interrupted by such transfer

   2. the terms and conditions of service after such transfer shall in no way be less favourable to the employees than those applicable to him immediately before the transfer, and

   3. the Purchaser shall be liable to pay to the employees, in the event of his retrenchment, compensation on the basis that his service is continuous and has not been interrupted by such transfer.
       

7. The Vendor agrees to transfer the balances to the credit of the employees of the said undertaking in the Provident Fund, Gratuity Fund, Superannuation Fund etc., to the corresponding funds, of the Purchaser, respectively.
    

8. The Vendor shall prepare and timely file, all tax returns required to be filed after the date hereof and on or before the closing date, and shall timely pay any and all taxes which term shall include all levies, cesses and other statutory charges and estimated taxes, including additions, interest and penalties, required to be paid by it after the date hereof and on or before the closing date, other than payments of taxes which the Vendor elects to contest in good faith. The Purchaser alone shall be liable and responsible for the payment of stamp duty, registration charges, sales tax and any other taxes arising out of and payable in connection with the transfer of the said undertaking hereunder.
    

9. Except as otherwise provided in section 8 above, the purchaser, and the Vendor, shall bear their respective expenses incurred in connection with the preparation, execution and performance of this agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel and accountants and no such expenses shall be included in any of the assumed liabilities.
    

10. The Vendor and the Purchaser agree and undertake to enter into a separate agreement, for a consideration to be mutually agreed, whereby the Vendor will not compete in any way with the Purchaser in the field of pharmaceutical business.
     

11. The Vendor shall draw a Profit & Loss Account and Balance Sheet as on the date of closing in respect of the said undertaking. All profits earned or losses incurred up to the date of closing in respect of the said undertaking shall belong to the Vendor.
     

12. The Vendor shall, to the fullest extent permitted by law, indemnify, defend and hold harmless the Purchaser and its affiliates, including the directors, officers, employees, agents and authorized representatives and shall pay and/ or reimburse to the Purchaser the full amount of any damage, loss, claim, liability and costs, charges and expenses including all reasonable costs charges and expenses of defending any suit, action claim or proceedings, including attorneys fees which the Purchaser may face, suffer or incur on account of or arising from the breach by the Vendor of the covenants and of the representations and warranties of the Vendor set forth in this agreement.
     
    The Purchaser shall, to the fullest extent permitted by law, indemnify, defend and hold harmless the Vendor and its directors, officers, employees and agents and shall pay and/ or reimburse to the Vendor the full amount of any damage, loss, claim, liability and costs charges and expenses (including all reasonable costs, charges and expenses of defending any suit, action claim or proceedings, including attorneys fees) which the Vendor may face, suffer or incur on account of or arising from the breach by the Purchaser of any of the covenants set forth in this agreement and of the representations and warranties of the Purchaser set forth in this agreement.
     

13. In the event of the transfer not taking place because of not getting the required statutory approvals or any other reason whatsoever, either party shall be entitled to cancel the agreement.
     

14. The Vendor shall retain for a period of at least 8 years from the transfer date all books of account, papers and documents relating to the said undertaking as required under any law.
     

15. The Vendor and the Purchaser agree and undertake to fully co-operate with and assist one another with a view to faithfully and effectually implement the provisions of this agreement in accordance with its terms.
     

16. In the event of any dispute or difference between the parties regarding the interpretation of this agreement or any other matter relating or pertaining thereto or arising therefrom, the same shall be referred to arbitration under the provisions of the Arbitration and Conciliation Act, 1996 or any other law relating to arbitration for the time being in force.
     

17. Neither party shall assign this agreement to any other person without prior written consent of the other party to this effect.
     

18. No amendment to this agreement shall be valid or binding on the other party unless the amendment is agreed to in writing by the both parties.

IN WITNESS WHEREOF the parties hereto have hereunto set and subscribed their hands the day and year hereinabove mentioned.