“A great deal will depend on the decision on how a business is sold, from tax issues to liability for debts. “Liability for debts is extremely important when selling and acquiring a business or part of a business and often determines how the transaction is carried out,” says Bartosz Kuraś representing the Corporate M&A practice in the Poznań office of law firm Wolf Theiss.
As a rule, when selling a business, we have various options for carrying out the transaction. We can carry out a transaction consisting precisely in the disposal of an enterprise or its organised part, or direct our attention towards a transaction concerning shares in the company to which the enterprise belongs.
“In practice, the question usually arises as to whether the transaction will involve the disposal of a business or an organised part thereof, or whether it will be an asset-only transaction. In such a case, the decisive question for the buyer is usually whether he will be held liable for the liabilities of the seller related to the business, which by law apply jointly and severally to both the seller and the buyer of the business, and which does not exist if only the assets are purchased. The classification of the object of the transaction is independent of the will of the parties and defining it in the contract as an ‘asset’ does not prejudge the fact that there is a sale of the business after all. A careful assessment of each situation is necessary, especially to ensure that the buyer does not have to face the risk of possible liability towards the creditors of the seller of the enterprise or a clash with e.g. the tax administration,” says Bartosz Kuraś of Wolf Theiss law firm.
Whether we are dealing with an enterprise is defined in Article 551 of the Civil Code (KC). It is an organised group of intangible and tangible components designed to conduct business activities. In addition, it is specified that these components may include, in particular, the business name, rights to real property (ownership, rights under leases or other legal relationships), rights under contracts, patents, permits, licences or business secrets.
Of course, there is no problem when we are clearly dealing with an enterprise, because the subject of the transaction is a certain clearly related whole, comprising real estate, movable property intended for the operation of the business, including the production line, rights from any contracts that relate to the enterprise, including rights from contracts with suppliers and customers, and, in addition, the transaction also relates to the persons employed in the enterprise in question, e.g. if the transfer of the workplace takes place as part of the transaction. It is, however, more difficult to assess the subject matter of the transaction in borderline situations where, for example, the real estate itself with the production line and a few more selected components are transferred. Against this background, disputes, including tax disputes, often arise in connection with the sale of real estate. Simply put, the sale of assets, such as real estate or movable property, involves VAT. If, on the other hand, the same immovable or movable property is sold as part of a business, VAT is not charged. Instead, the tax on civil law transactions applies. A misjudgement of the subject matter of the transaction and incorrect tax calculation may result in sanctions from the tax office.
“A legal and tax analysis of the subject of the transaction in terms of the correct tax qualification and agreeing on the appropriate structure of the transaction is crucial, especially when a part of a company or a set of certain assets is acquired. Checking and carrying out tax simulations is, in terms of proper taxation, the first important aspect. Another relates to the buyer’s potential liability for obligations related to the business and addressing these issues appropriately during the legal and financial examination preceding the transaction and in the transaction documents,” adds Kuraś.
Pursuant to Article 554 of the Civil Code, the buyer of an enterprise is jointly and severally liable with the seller for the seller’s obligations related to the operation of the enterprise, unless the buyer was not aware of these obligations at the time of acquisition despite exercising due diligence. Moreover, the liability of the purchaser is limited to the value of the acquired enterprise. As is clear from this provision, the seller’s liability is therefore, at least theoretically, greater – as in his case there are no such limitations.
“Essentially, this means that it is the seller’s creditor who can choose from whom it decides to claim the liability – the seller, the buyer or both (although in the case of the buyer this is limited to the value of the transaction). For example, the bank that granted the seller a loan relating to the business sold may claim repayment from whoever bought the business. The buyer will, of course, have a corresponding recourse claim against the seller, although the seller may not always still be solvent and there may then be a problem in seeking repayment from the seller. This applies, of course, only to those liabilities which were known at the time of the transaction or which should have been known with due diligence,” emphasises Kuraś.
What about the situation when the liabilities are disclosed after the transaction has already taken place? Well, it is possible to waive the buyer’s liability if he was unaware of it – however, this requires proof.
In professional trade, a heightened measure of diligence towards the buyer will apply here. The main burden of proving lack of knowledge and due diligence will fall on the buyer, which is why it is so important that the buyer or its professional advisors carry out an adequate examination of the business to be acquired prior to the transaction. It is also possible to exclude the buyer’s liability for obligations relating to the operation of the business prior to its acquisition with the consent of the seller’s creditor. The seller’s liability in question may then be excluded from joint and several liability, remaining with the seller only. This is generally associated with the establishment of additional security for the benefit of such a creditor or its repayment, explains the expert.
The provision describing joint and several liability for the obligations of the buyer and seller obviously has some exclusions. For example, it does not apply to the purchase of a business in bankruptcy or enforcement proceedings. The purchaser of a business in bankruptcy proceedings acquires the business in an unencumbered state and is not liable for the bankrupt’s liabilities, and the encumbrances on the business’s assets are extinguished (with certain exceptions, such as, inter alia, easements, usufruct and life tenancies).
Instead of selling the business (assets), the shares in the company can be sold. The provisions on joint and several liability of the purchaser of the business then do not apply, as there is no direct sale of the business. The assets continue to remain with the company whose shares were traded. The company continues to be liable to its creditors and the buyer of the shares does not become jointly and severally liable to the company’s creditors. If it turns out that there are liabilities of which the buyer of the shares in the company was unaware (for example, a demand for repayment of a loan by a bank, a claim by a customer against the company or outstanding debts to a supplier), the company is liable. For the buyer, on the other hand, the scenario remains somewhat comparable; what he or she has purchased is potentially of less value than anticipated, which may lead to a claim against the seller. For the buyer, however, the situation is similar in that what he has acquired has less value than he anticipated and may have a claim against the seller. It is therefore also in his interest to adequately examine the company, including its business, before acquiring it, the expert concludes.
The fact that the issue of sale and succession in Polish companies will become increasingly important in the years to come is evidenced, for example, by data from the Central Register and Information on Business Activity. Out of more than 2.4 million active entrepreneurs, approximately 470 000 have already reached the age of 60. At the same time, in Poland, the succession rate in family businesses reaches 30% in the case of the second generation, and only 8% of successors declare their intention to take over family businesses, which also indicates the upcoming interest in the process of selling businesses, especially family businesses.
