- Introduction
This Article provides a detailed analysis of how a slump sale is regulated under the Companies Act, 2013, specifically in the context of a private limited company. Although the Act does not define “slump sale” (a concept primarily arising from income tax law), its execution by a company is governed principally through provisions dealing with the sale of an “undertaking” and through the mechanism of schemes of arrangement.
The relevant statutory framework comprises:
- Section 180(1)(a) – Restriction on sale of whole or substantially whole of an undertaking.
- Section 180(3)- (4) – Exceptions and conditions.
- Sections 230- 232 – Slump sale through a Scheme of Arrangement.
- Section 180(1)(a): Primary Regulatory Provision for Slump Sale
- Requirement of Special Resolution
Section 180(1)(a) mandates that the Board of Directors may sell, lease, or otherwise dispose of the whole or “substantially the whole” of an undertaking only with prior approval of shareholders by a special resolution.
A slump sale being a transfer of an undertaking as a going concern triggers this provision where the asset being transferred qualifies as an “undertaking.”
- Definition of “Undertaking” — Explanation (i)
An undertaking is defined using quantitative thresholds:
- Investment Threshold: Investment exceeds 20% of company’s net worth (as per audited balance sheet of preceding financial year); or
- Income Threshold: Undertaking generates 20% or more of the total income of the company in preceding financial year.
Net worth has the meaning assigned in Section 2(57).
- “Substantially the Whole of the Undertaking” — Explanation (ii)
This means 20% or more of the value of the undertaking, as per the audited balance sheet of the preceding financial year.
- Multiple Undertakings
Where a company owns more than one undertaking, the thresholds are applied independently to each undertaking. Sale of any undertaking meeting the threshold triggers Section 180(1)(a).
- Section 180(3): Statutory Exceptions
Section 180(3) carves out limited exceptions:
- Ordinary Business Exception (Purchaser Protection): Title of a bona fide buyer is protected even if the company failed to obtain the required special resolution.
- Ordinary Course of Business Exception: If buying and selling undertakings is the ordinary business of the company, Section 180(1)(a) does not apply.
These exceptions rarely apply to operational companies executing slump sales.
- Section 180(4): Conditions in Special Resolution
When a company does pass a special resolution for slump sale, the shareholders may impose legally binding conditions, including:
- Use or application of sale proceeds
- Restrictions on further disposal or reinvestment
- Time limits for deployment
- Prohibitions on dividend distribution from proceeds
However, a special resolution cannot authorize reduction of capital, which must comply with separate statutory provisions.
- Slump Sale Through NCLT Scheme: Sections 230–232
A slump sale may also be executed through a Scheme of Arrangement under Sections 230–232 of the Companies Act, 2013. This approach requires the company to obtain approval from the National Company Law Tribunal (NCLT), along with the requisite consents from stakeholders—specifically, approval of members and creditors holding at least 75% in value. The scheme must also go through the standard regulatory review process, including filings before the Registrar of Companies, scrutiny by the Regional Director, and examination by the Income Tax authorities, wherever applicable. Additionally, the company must furnish an auditor’s certificate confirming that the accounting treatment proposed in the scheme complies with Ind AS 103.
This mechanism results in the statutory transfer of all assets, liabilities, and obligations by operation of law and is therefore the preferred route for complex or large-scale corporate restructurings.
5.1 Section 230 – Application to NCLT
An application must be filed before the NCLT along with:
- Board resolution
- Draft scheme
- Financial statements (up to 3 years)
- Details of members and creditors
- Affidavit and supporting documents
- Consents where required
The NCLT may order meetings of shareholders and/or creditors.
5.2 Section 230(3)-(4): Meetings and Approvals
Approvals required:
- Members:
- Three-fourths in value, and
- Majority in number present and voting.
- Creditors:
- Three-fourths in value (where creditors are affected)
5.3 Section 230(5): NCLT Sanction
Even after requisite approvals, the NCLT retains discretion to sanction or reject the scheme based on fairness and stakeholder protection.
- Section 232: Legal Consequences of NCLT-Sanctioned Scheme
Section 232 provides the statutory mechanism through which undertakings, assets, liabilities, contracts, and employees transfer automatically.
6.1 Transfer by Operation of Law
Upon the effective date:
- All undertakings, property, and liabilities of the transferor vest in the transferee without any separate conveyance.
- All legal proceedings continue automatically against or by the transferee.
- Shares held by transferee in transferor are cancelled.
- Transferor company is dissolved without winding up.
6.2 Employee Transfer
All employees of the transferor become employees of the transferee with full continuity of service.
6.3 Filing and Compliance
- Certified copy of the NCLT order must be filed with ROC within 30 days (non-compliance attracts penalties).
- Annual statement of compliance must be filed until full implementation of the scheme.
- Integrated Framework: How Slump Sale Is Regulated
The starting point is to examine whether the business being transferred qualifies as an “undertaking,” based on the statutory thresholds of 20% of the company’s net worth or 20% of its total income in the preceding financial year. Where this threshold is met and Section 180 is attracted, the transaction would ordinarily require prior shareholder approval by way of a special resolution, unless the company falls within the category of exempt private companies.
If the thresholds are not met and Section 180 is not applicable, the Board may approve the slump sale on its own authority, allowing the parties to proceed through a Business Transfer Agreement. In cases where the transaction forms part of a broader restructuring exercise, companies often prefer to implement the transfer through a Scheme of Arrangement under Sections 230–232, which involves NCLT approval and consent from affected stakeholders.
A direct slump sale becomes effective upon execution and closing of the Business Transfer Agreement, whereas a transfer carried out through a Scheme takes effect only upon NCLT sanction and from the appointed date specified within the scheme.
- Conclusion
Under the Companies Act, 2013, slump sale is regulated through:
- Section 180(1)(a) – primary approval mechanism
- Scheme of Arrangement route (Sections 230–232) – offering statutory vesting and court-supervised protection
The applicability of these provisions depends largely on whether the business being transferred qualifies as an “undertaking” and the chosen mode of transfer.