Summary: This article examines the impact of business transfers on pre-qualification credentials, including the interpretation by various courts on the position of their transfer in case of business transfers through a scheme of arrangement or through a slump sale of an undertaking, and discusses the important factors required to ensure successful transfer of pre-qualification credentials.
Introduction
Business transfers, including through schemes of mergers, amalgamations, or demergers, are strategic structuring options frequently used by Indian companies to streamline operations and unlock value or even facilitate the sale of an undertaking to a prospective buyer. While undertaking such business transfers, companies that have entered into any contracts, following a tender process that required submission of prequalification credentials (“PQCs”), should ensure that the benefits of such PQCs, relevant to the business being transferred, is also properly transferred.
Safeguarding ongoing projects is crucial because the tendering authority may reject bids if PQCs are not met when issuing the letter of acceptance for the bidder’s proposal, and a change in PQCs after execution of the contract may constitute default under the relevant contract. Loss of PQCs, following a business transfer, may also impact the eligibility of a company in bidding for and securing future projects.
This article discusses the impact of business transfers on PQCs, including the interpretation by various courts on the position of transfer of PQCs in case of business transfers through a scheme of arrangement or through a slump sale of an undertaking.
Prequalification
Prequalification is a process whereby potential bidders are assessed by tendering authorities (typical for Government contracts) for their eligibility to meet certain pre-determined qualification requirements necessary to perform a contract, before they are invited to submit their bids. Such PQCs are generally stated in the notice of invitation issued by the tendering authority and may include criteria such as turnover, net worth, years or experience or operation, experience of similar works, credentials of personnel, financial standing, equipment capabilities and litigation history.
Business transfer pursuant to a scheme of arrangement
The transfer of PQCs through the scheme of demerger or amalgamation is generally permissible. In New Horizons Limited v. Union of India[1], the Supreme Court ruled on whether members of a joint venture could rely on the benefit of resources and strength of its parent group companies for submission of tenders to the Department of Telecommunications (Hyderabad), in case of a reorganisation as a result of merger or amalgamation, the relevant experience of the constituent companies should be considered, even if the tender is submitted in the name of the reorganised company. Similarly, in a transfer of experience during a demerger, the authorities should assess if the relevant experience of the demerged entity, including the experienced personnel, have been transferred.
In Technocrats Advisory Services Private Limited v. Union of India through the Ministry of Road Transport & Highways[2], upon review of the provisions of the scheme of demerger, the Delhi High Court held that necessary experience and expertise stood completely transferred to the resultant entity, which can, therefore, subsequently claim the benefit of all ongoing contracts and empanelment. In Medium Packaging Private Limited v. Indian Oil Corporation Limited[3], the Calcutta High Court noted that on a conjoint reading of the provisions of the scheme, all consents, licences, certificates, clearances, authorities, powers of attorney, existing contracts, machinery, land and workmen with past experience of executing the relevant tenders stood transferred to the transferee company with effect from the appointed date. While upholding the decision of the tendering authority to award the contract to the transferee company, the Calcutta High Court opined that the tender evaluation committee should lift the veil, go behind the facade of the company and look into the result of the reorganisation of the company.
Courts have, therefore, consistently relied on the provisions of the underlying scheme to interpret the transfer of PQCs in case of a transfer of business through a scheme of arrangement, reaffirming the importance of ensuring that the content of the scheme is broad enough to include all relevant aspects of the transferred business, including the PQCs and that while drafting the scheme of arrangement, the relevant PQCs proposed to be transferred should be clearly mentioned to receive the sanction of the court.
Business transfer pursuant to a slump sale agreement
While transfer of PQCs pursuant to a scheme of arrangement is more straightforward as they carry the sanctions of the courts, courts have also examined the transfer of PQCs within the framework of slump sales through contractual arrangements.
In Consortium of Alstom Transport India Limited & Alstom Transport S.A. & Another. v. Dedicated Freight Corridor Corporation of India Limited & Another[4], Alstom Transport India Limited (“ATIL”), the lead petitioner, had acquired a transport business from a group company, Alstom India Limited (“AIL”) through a slump sale pursuant to an Agreement to Sell Business (“ASB”) as part of a global restructuring. Dedicated Freight Corridor Corporation of India Limited (“DFCC”) rejected the bid of the joint venture formed by the petitioners on the grounds that the transferred business was not a separate legal entity and that ATIL could not claim AIL’s experience. The Delhi High Court took a commercial and purposive view that the ASB explicitly contained language transferring all rights, obligations, and past track record of AIL, including without limitations, the credentials, eligibility, experience and market share for all commercial and regulatory purposes, including for the purpose of eligibility, standing, evaluation and participation of ATIL in all existing and future bids, tenders and contracts of all authorities, agencies and clients. The Court also observed that all contracts of AIL’s expertise, personnel, knowhow and intellectual property were also transferred, leaving AIL with no residual capability in the transferred business. Rejecting DFCC’s objections, the Court held that the experience of AIL was legally and factually attributable to ATIL and directed DFCC to evaluate the consortium’s bid on its merits.
Therefore, it is imperative that the drafting of the slump sale agreement or the business transfer agreement (“BTA”) is precise, detailed, comprehensive and encompasses all possible aspects of the undertaking being transferred, including inter alia the past track record, employees, experience, credentials and market share of the transferor entity as well as third party certifications for completed past work.
Additional Safeguards
It is also important to ensure that the transfer of the business undertaking is properly consummated in terms of the provisions of the BTA before submission of bids to any tendering authority. The Delhi High Court in SRSC Infra Private Limited v. National Highways Authority of India[5] upheld the NHAI’s rejection of the petitioner’s bid on the grounds that the petitioner had not satisfied the closing conditions under the relevant BTA, before the bid submission date, meaning the transferee company had not acquired full ownership/ rights of the transferor entity for the purposes of eligibility under the tender. Consequently, the computation of net-worth of both entities could not be treated as one under the tender. The Court further emphasised that financial capacity must be established as of the tender cut‑off date, and incomplete or prospective transfers cannot be taken into account.
Additionally, in relation to ongoing projects, tender conditions related to restructuring should be examined carefully as any changes in the structure of a bidding entity could impact its eligibility. In Consortium of Siemens Limited and Others v. Dedicated Freight Corridor Corporation of India Limited and Another[6], Siemens A.G. and Siemens S.A. (Spain) had formed a consortium that was confirmed as pre-qualified by the DFCC, and which intended to transfer their mobility business along with bid-related rights, obligations, expertise, human, technological and infrastructural resources to Siemens Mobility, S.L.U. (a wholly owned subsidiary of Siemens A.G.). DFCC rejected the requested assignment, and the Court upheld the decision, noting that Siemens Mobility, S.L.U. was neither a part of the original consortium nor a bidder itself, and that the qualifications of the original bidders had changed. The Delhi High Court distinguished earlier cases such as New Horizons[7] and Alstom[8], emphasising that in those instances, the core business was transferred into the bidding entity, not out of it. The tender terms required DFCC’s prior written approval for any structural changes before the bid deadline, and it retained discretion to reject changes that compromised compliance with PQCs. Therefore, any restructuring must not undermine the integrity of the bidding process, and the bidder must ensure continued compliance with PQCs to avoid risk of disqualification and termination.
Conclusion
The transfer of PQC, including experience, past performance, financial standing, and technical credentials, is legally permissible and enforceable, provided that the restructuring is appropriately documented, and demonstrates substantive continuity of business operations. It must be noted that successful transfer of PQCs is not automatic and requires meticulous attention to several critical factors, including: (i) comprehensive drafting of schemes of arrangement or BTAs that clearly delineate the transfer of all relevant assets, liabilities, contracts, employees, licences, approvals, experience, credentials, and past track records; (ii) consummation of all aspects of the business transfer before participation in tender processes; and (iii) compliance with specific terms and conditions of tenders, particularly those relating to consent requirements for structural changes during ongoing bid processes.
[1] (1995) 1 SCC 478.
[2] (2018) SCC OnLine Del 9951.
[3] (2019) SCC OnLine Cal 7108.
[4] (2017) SCC OnLine Del 10132.
[5] (2021) SCC OnLine Del 3640.
[6] (2019) SCC OnLine Del 11844.
[7] Supra note 1.
[8] Supra note 5.