Supreme Court on Successor Liability

In the past, we have discussed
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.
Now, it appears that there may be
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
of this decision by Harsh Kumar in Singapore Law Review’s Juris Illuminae.
An expansive scope towards
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:
The Supreme Court
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
From a
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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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