the difficulties of imposing successor liability on the purchaser of a
business when such liabilities pertain to those incurred by the seller prior to
the sale and purchase transaction. This issue has come up (without satisfactory
resolution) in the Bhopal gas tragedy.
some shift in the approach with a decision of the Supreme Court of India last
year in McLeod
Russell India Limited v. Regional Provident Fund Commissioner, Jalpaiguri.
In this case, the Court imposed a past-period liability on the purchaser of a
business even though the contract specifically retained that to be borne by the
seller. I refer readers to a detailed
analysis of this decision by Harsh Kumar in Singapore Law Review’s Juris Illuminae.
successor liability would have to be considered while structuring asset or
business acquisition deals. The implications of the decision as pointed out by
Harsh are extracted below:
has clarified that, in the case of a transfer of a business or establishment,
in respect of which provident fund dues are pending, the seller and the
acquirer will be jointly and severally liable to pay not only the pending
provident fund amount but also damages, if any, imposed by the government
authorities. It is now imperative for an acquirer to undertake a detailed
diligence on the status of provident fund payments by a company or
establishment, otherwise it may have to shoulder all pre-closing provident fund
transactional perspective, acquirers of a business should consider an escrow to
appropriately ring-fence their liability for provident fund dues of a company
or establishment. If an escrow is not commercially feasible, then acquirers may
consider adjusting the valuation for the business, or seeking a specific
indemnity from the seller for liabilities not expressly assumed by the
acquirers. An insurance cover may also be obtained to appropriately safeguard
against pre-closing liabilities. These safeguards and the manner in which
parties will bear associated costs for implementing these safeguards should be
negotiated with the seller while finalising the business purchase agreement.