Hiving Off The Business/Sale 

Of Undertaking​
Hiving Off The Business/Sale Of Undertaking​

• The term ‘Undertaking’ as interpreted in the present context means a unit, a project or a business
as a going concern.​

• It does not include individual assets and liabilities or any combination thereof not constituting a
business activity.​
• ​
• Under a sale as a going concern, the rights, liabilities and obligations of all the affected parties (eg.
debtors, creditors, employees etc.) are protected.​

•  It provides for the continuation of the running of the undertaking without any interruption.​
Precaution taken by the buyer

• In a going concern principle the buyer inherits both benefits and liabilities from

the ongoing contracts that may arise at a later date even with respect to past
transactions.​

• There should be clear provisions in the sale agreements fixing the responsibilities

of the parties in this behalf.​
Legal Aspects of Hiving Off

• Memorandum of Association:​
• Transferor Company: The MOA of the company shall contain a provision  empowering the
company “to sell or dispose off the whole or any part of the undertaking, or of any of the
undertaking of the company”.​

•  If there is no provision in that regard, then the MOA can be amended under section 17 of the
Companies Act by passing a special resolution.​

• Transferee Company: The objects clause of the transferee company shall also contain such a
provision for carrying on the business that it seeks to acquire.​

• However it is not necessary that the objects of the two companies should be in unison.​
Consent of the Creditor

• Consent of the Creditors: The company needs to take consent of high value

creditors in writing, if the assets on which the loans were raised are transferred (as
a part of the industrial undertaking).​

• Only then the loans can be transferred or the assets can be released from the
charge.​

• Under the provisions of Section 50B of the Income Tax (IT) Act any profit from
lump sum transfer of a division or an undertaking shall be chargeable to income
tax as capital gains.​
Successors and Assigns Provision

• A standard successors and assigns clause would be something like:​

“This Agreement shall be binding upon and shall inure to the benefit of the parties and
their permitted successors and assigns.”​

• A successor is a third party that either acquired or merged with one of the parties to the
agreement.

•  Assigns are third parties that the agreement has been assigned to as may be allowed
under the terms of the agreement. ​

• Generally Parties are not allowed to assign the agreement to another party without

your consent, but a common exception to that is when the​ agreement is used by a
business and that business is sold to a third party.​
Successors and Assigns Provision

•  Courts have interpreted a successors and assigns provision five different ways.​

•
1.To bind an assignee to perform.​
2.To bind the non-assigning party to continue to perform.​
3.To determine whether rights are assignable.​
4.To determine whether performance is delegable.​
5.To bind those successors and assigns to the agreement.​
 Successor’s Liability

General Rules
• 1. A successor corporation is liable for the debts and liabilities of its predecessor where there is a merger or
consolidation of the two entities.
• 2. In contrast, a purchaser (“Asset Purchaser”) of all or substantially all of the assets of a seller does not by
operation of law assume the liabilities of the seller (“Seller”).

Common Law Exceptions

• Asset Purchaser is vicariously liable for the debts and liabilities (including environmental and product
liability) of Seller if one or more of the following common law exceptions apply:
• Asset Purchaser expressly or impliedly agrees to assume the debts or liabilities of Seller The transaction
amounts to a de facto merger or consolidation
• Asset Purchaser is a mere continuation of Seller
• The transaction is an effort to fraudulently avoid liability
Successor’s Liability

Other Theories
• Courts may also hold Asset Purchaser liable beyond the bounds of the common
law rules if: There is substantial identity between the operations of Seller and
Asset Purchaser
• Asset Purchaser manufactures same product line as Seller