query regarding takeover of business of director's proprietorship firm
Vandana Jain
Amit Kumar Sinha
M-0- 7065051934
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Shri G
There is no specific provision under the Companies Act, 2013 governing the takeover of a proprietorship concern by an existing private limited company. Such takeover is generally effected through a Business Transfer Agreement (BTA) or Slump Sale Agreement, depending upon the structure adopted.
First, verify whether the existing Object Clause of the company permits acquisition or takeover of another business. Alteration of MOA will be required only if the existing objects do not adequately cover such activity.
Board approval should be obtained for entering into the takeover arrangement. Further, if the transaction qualifies as a related party transaction under Section 188, necessary approvals should be examined. Valuation may also be advisable, particularly where consideration is proposed to be discharged through issue of shares.
The Business Transfer Agreement should clearly deal with transfer of assets, liabilities, contracts, employees, goodwill, receivables and payables. Necessary consents from lenders, customers and creditors should be obtained wherever required.
From an Income-tax perspective, it should be examined whether the transaction can qualify under Section 47(xiv) of the Income-tax Act relating to succession of proprietorship by a company. If the prescribed conditions are not satisfied, capital gains and other tax implications may arise.
From a GST perspective, treatment of transfer of business as a going concern should be examined. Availability and transfer of unutilised GST input tax credit balance should also be reviewed.
Special care is required where the proprietorship is engaged in government contracts or tender-based business, as many authorities may require fresh approvals, registrations or novation of contracts before recognising the company as successor. Similar caution should be exercised where the proprietorship holds licences or approvals that are not freely transferable.
There is no specific ROC form prescribed merely for takeover of a proprietorship concern. However, consequential filings may arise depending upon the structure adopted, such as MGT-14, PAS-3, SH-7 or other applicable forms.
