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 analysis 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 liabilities.
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.