A company’s debt – that is, the existence of financial liabilities to creditors, government agencies or business partners – does not rule out the possibility of a sale, but it does significantly affect the course of the transaction and its terms. In practice, it is very rare for a business, particularly one that has been operating for many years, to have no liabilities whatsoever. The difference lies in the scale of the debt and its nature – ranging from trade liabilities, through loans, to arrears owed to the Social Insurance Institution (ZUS) or the tax office. Many business owners fear that the presence of debts prevents the sale of the company or exposes them to liability after the transaction has been completed. On the other hand, buyers often view an indebted company as a risky purchase. In reality, Polish law permits both the sale of shares in a company burdened with debt and the sale of a business or an organised part of its assets, even if financial liabilities exist as at the date of the transaction. However, proper preparation of the transaction is key – conducting legal and financial due diligence, drafting the agreement correctly, and managing legal risks effectively. The sale of an indebted company is not a simple process, but with the right approach it can be an effective solution for both current owners and new investors.
Basic concepts and distinctions
Before we move on to analysing the possibilities of selling an indebted company, it is worth clarifying the key concepts and legal mechanisms that determine the course of such transactions.
Sale of shares versus sale of the business
The most common forms of transaction are the sale of shares (in a limited liability company) or stock (in a joint-stock company), i.e. a ‘share deal’, and the sale of a business or an organised part thereof (an ‘asset deal’). In the case of a share deal, the purchaser assumes the rights and obligations of a partner or shareholder – the company itself remains a party to the concluded contracts, the owner of the assets and the entity subject to all liabilities. This means that the company’s entire debt remains with it, regardless of the change of ownership. In the case of the sale of an enterprise or an organised part thereof, the purchaser takes over a specific set of assets and, in accordance with the provisions of the Civil Code, as a rule also assumes liability for the associated obligations.
Creditor and debtor after the transaction – universal and singular succession
When there is a change of ownership of a company’s shares (share deal), nothing fundamentally changes for creditors – the company remains the debtor. However, in the case of the sale of a business (asset deal), so-called singular succession occurs: the purchaser of the business is jointly and severally liable with the seller for the liabilities associated with the business’s operations, existing on the date of sale, up to a specified amount. This is of particular significance for the buyer’s legal certainty and for the seller’s risks. Understanding these fundamental distinctions allows one to prepare properly for the sale process and to make an informed assessment of the risks associated with acquiring an indebted entity.
Transaction models allowing for the sale of a company with debt
The sale of a company burdened with debt can be carried out in several different ways, each of which involves a different distribution of risks and legal consequences for the seller, the buyer and the creditors. In practice, there are three basic models for such transactions.
Sale of shares (share deal)
The most common approach is the sale of shares (in a limited liability company) or stock (in a joint-stock company). In such cases, the subject of the transaction is the shares, whilst the company itself remains the debtor – regardless of any change in ownership. This means that all of the company’s liabilities, both disclosed and potentially undisclosed, are transferred to the new owner indirectly – through the acquisition of a controlling stake. Of key importance here are appropriate mechanisms to safeguard the buyer’s interests, such as a detailed due diligence review, the inclusion of representations and warranties by the seller, or the establishment of rules regarding liability for any hidden liabilities.
Sale of a business or an organised part of its assets (asset deal)
An alternative to a share deal is the sale of an enterprise or an organised part thereof, known as an asset deal. In this case, the subject of the transaction is a set of assets (e.g. real estate, machinery, contracts, trademarks), rather than the shares themselves. Under this model, liability for obligations related to the enterprise’s operations also passes to the purchaser to a specified extent. The regulations provide for joint and several liability of the seller and the buyer for debts incurred prior to the date of sale, within the limits of the value of the acquired assets. In practice, it is often necessary to obtain the consent of certain creditors for the assumption of contracts or to inform them of the change in ownership of the business.
Due diligence of an indebted company
Conducting a detailed due diligence is one of the key stages in preparing for the sale of a company with debt. A thorough examination of the legal, financial and tax status allows not only for the proper assessment of the transaction risk, but above all for the identification of all liabilities that may burden the company – both those disclosed in the accounts and any potentially hidden ones. In practice, due diligence covers the following areas: Financial analysis – a detailed review of the balance sheet, profit and loss account, and short-term and long-term liabilities. This analysis allows the debt structure to be determined (e.g. loans, borrowings, trade payables), the current level of liquidity to be assessed, and unusual items that may affect the transaction risk to be identified. Legal analysis – examination of commercial contracts, particularly those securing the repayment of liabilities (e.g. loan agreements, pledges, mortgages, guarantees, sureties), checking entries in public registers (KRS, MSiG, CRBR) and ongoing court and enforcement proceedings. It is worth paying attention to contingent liabilities, e.g. those arising from guarantees or potential claims by counterparties. Tax and social security analysis – a key element of the review is the assessment of the status of settlements with the tax office and the Social Insurance Institution (ZUS). The purchaser of the company should obtain up-to-date certificates of no arrears or verify any ongoing audit proceedings in order to limit their own liability for public law arrears. Identification of risks not disclosed in documents – some liabilities may not be explicitly disclosed in the financial documentation; therefore, it is also essential to conduct interviews with the management and key employees, and to analyse correspondence with creditors. This allows for the detection of any disputed liabilities or risks arising from ongoing negotiations. Thorough due diligence not only minimises the risk of ‘surprises’ after the transaction is closed, but also forms the basis for negotiating appropriate safeguards in the sale agreement. For both parties to the transaction, this is a crucial stage that often determines its final terms and success.
Liability of the parties after the transaction
The conclusion of a sale agreement for an indebted company, regardless of the transaction model adopted, does not automatically resolve the issue of liability for existing obligations. Both the seller and the buyer must be aware of the scope and nature of potential claims that may arise after the transaction has closed.
Sale of shares (share deal)
In the case of a sale of shares, the company itself remains the debtor. This means that creditors continue to direct their claims directly at the company, regardless of who owns it. The new purchaser assumes full control of the company, together with its assets and liabilities, including those that may not have been disclosed during the due diligence process. It is worth noting that the personal liability of the seller (e.g. former board members) for the company’s liabilities is limited and applies only in specific situations provided for by law.
Sale of an enterprise or an organised part of the assets (asset deal)
In the case of an asset deal, both the seller and the buyer are jointly and severally liable for liabilities arising prior to the date of sale, to the extent specified by civil law. The scope of this liability is limited to the value of the acquired assets as at the date of acquisition. Joint and several liability means that the creditor may pursue a claim against either the seller or the buyer, at their discretion, until the debt is fully satisfied. In practice, contractual safeguards such as recourse clauses or guarantees are often used, which allow for the settlement of any claims between the parties to the transaction.
The importance of a proper contract
Post-transaction liability depends largely on the correct drafting of the sale agreement and the implementation of effective safeguards, such as representations and warranties by the seller, contractual penalties or settlement mechanisms. From the buyer’s perspective, it is crucial to protect against claims that may arise after the acquisition of the company or business.
Summary
The sale of a company with debt is a process requiring not only legal knowledge but also caution and careful preparation. Debt does not preclude the possibility of selling the company – both Polish law and market practice permit the sale of shares in a company with debts (a so-called ‘share deal’) and the sale of a business or an organised part thereof (an ‘asset deal’). However, each of these models has different legal consequences for the parties and entails a specific scope of liability for obligations arising prior to the transaction. Conducting detailed due diligence is crucial for the security of both parties to the transaction. It allows for the identification of all the company’s obligations (including contingent or disputed ones), the assessment of risks, and the appropriate drafting of the provisions of the sale agreement. For the buyer, contractual safeguards are essential, such as representations and warranties from the seller, contractual penalties, or other mechanisms to compensate for any ‘surprises’ after the transaction is closed. Liability for post-transaction obligations arises both from statutory provisions and from individual contractual terms. It is worth remembering that even the best-prepared agreement will not eliminate all risks, but proper identification and allocation of liability can limit the potential negative consequences of selling a company with debts.
She specializes in commercial and civil law. She has gained experience in Warsaw law firms providing comprehensive services to companies and a law firm specializing in labor law. She has extensive experience in corporate consulting. She has participated in mergers and acquisitions at every stage of the process, from pre-transaction legal examination to fulfillment of regulatory requirements related to the transformation process. She prepares and reviews contracts entered into by clients and advises in cases of…
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