Sale of a business and concessions, licences and permits

In this paper, we set out the general principles of liability of the parties in the event of the sale of a business, the conditions for modification of those principles and the solutions usually applicable in business sale contracts governing the liability principles between the parties.
The

1. principle arising from the Civil Code

The statutory principle of liability of the parties for obligations relating to the operation of the business sold provides that:

1. the purchaser of an enterprise is jointly and severally liable with the vendor for the vendor ‘s obligations relating to
2. the
3. operation of the enterprise ,
4. a purchaser who was not aware of these obligations at the time of acquisition, despite exercising due diligence , is not liable on this account; the purchaser
5. ‘s liability is limited to the value of the acquired enterprise as at the time of acquisition and at the prices at the time of satisfaction of the creditor (pro viribus patrimonii);
6. this liability cannot be excluded or limited without the consent of the creditor.

Ad. a) Obligations connected with the operation ofthe business The source of the joint and several liability of the seller and the buyer in the event of sale of a business is the functional connection of the obligation in question with the operation of the business sold.

If such a connection exists, the purchaser of the business by operation of law joins the seller’s debt and thus becomes an additional debtor from whom the creditor can enforce his claim.

This solution is intended to strengthen the protection of creditors in connection with the depletion of the seller’s assets as a result of the sale of a substantial asset in the form of a business (or organised part thereof).

As a general rule, the purchaser is jointly and severally liable for the vendor’s obligations relating to the operation of the business, and this principle is not modified by the arrangements of the parties made in the sale agreement, unless a modification of these rules has been agreed to by a creditor (as discussed below).

We have written about the issue of the acquisition of liabilities as part of the sale of a business and the risk of reclassification on the grounds of tax law in the article to be found at the link: Division of a company by separation – Warsaw – Kancelaria BBS i Wspólnicy (bbs-legal.pl).

Re. b) Knowledge of liabilitiesA circumstance that allows the purchaser of a business to exempt itself from liability for liabilities related to its operation is the lack of knowledge of such liabilities, despite the exercise of due diligence.

This means that a heightened measure of diligence is expected of the purchaser, which derives from the professional nature of the business. To this end, in the course of the transaction, the purchaser carries out legal, accounting, financial and taxdue diligence on the business in order to identify risks associated with the state of the business, which is ultimately reflected in the transaction documentation.

Ad. c) Statutory limitations of liabilityAlthough the liability of the seller and the buyer of the business is joint and several, the liability of the buyer, unlike that of the seller, is limited to the value of the acquired business as it stood at the time of acquisition and at the prices at the time of satisfaction of the creditor.

This means that:

• the vendor is personally liable with all his/her assets for the entirety of the liabilities relating to the operation of the business sold ( unlimited liability );
• the purchaser is personally liable and with all his/her assets, but limited to the value of the business acquired as at the time of acquisition, at prices according to the time of satisfaction of the creditor (liability pro viribus patrimonii).

The above liability rules can only be modified with the consent of the creditor, as discussed below.

Ad. d) Modification of liability rules based on the creditor‘s consentModification of the debtor’s liability rules is possible only with the consent of the creditor, and such modification may aim at:

• limitation / exclusion of the purchaser ‘s liability – the purchaser of the enterprise is released from his obligations after the creditor’s consent has been obtained or his liability is limited in a specific manner, thus the seller is invariably liable to the full or limited extent;

• limitation/exclusion of the vendor’s liability as a result of exonerating assumption of debt – as a result of obtaining the creditor’s consent, the joint and several liability of the vendor is limited/excluded, with the proviso that after the conclusion of the debt assumption agreement, the liability of the acquirer will not be limited to the value of the acquired enterprise (pro viribus patrimonii), as the acquirer will be the sole debtor from that time on.

1. 1. Limitation of liability under tax legislation

The purchaser of

a business is also liable for public-law liabilities incurred in connection with the operation of such a business, but the tax legislation provides a solution that allows the purchaser to determine the level of tax arrears and guarantees liability up to the amount indicated.

This is a certificate on the level of tax arrears of the transferor obtained pursuant to Article 306g of the Tax Ordinance.

Thanks to such a certificate, the acquirer is not liable for the seller’s tax arrears that were not indicated therein, unless they arose after the date of issuance of such a certificate and more than 30 days have passed between the date of issuance of the certificate and the date of acquisition of the enterprise.

Thus, if the certificate is issued less than 30 days before the date of acquisition of the enterprise, it eliminates the risk on the part of the acquirer of being liable for arrears not shown in the certificate.

In practice, the obligation for the seller to obtain such a certificate is a standard condition for the transaction to take place.

• • Transaction practice

In

practice, the liability rules of the parties to the transaction are regulated in detail in the transaction documents. However, it should be borne in mind that if the creditor’s consent has not been obtained for the modification of the liability rules, they are purely internal (between the parties to the contract).

In transactional practice, liability issues are usually regulated by, for example:

• imposing

an

• • obligation on a party to obtain the consent of creditors for the transfer of obligations from contracts

The parties

create an obligation in the sale agreement to obtain the consent of creditors for the transfer of obligations from specific contracts which are the subject of such transaction.

Once the consent of the creditors has been obtained, the purchaser of the Undertaking is relieved of the vendor’s liability, which is taken over by the purchaser, who enters as debtor into the obligations incumbent on the vendor and becomes solely responsible for them.

It should be borne in mind that once a debt is assumed, the purchaser becomes fully liable for the obligations assumed (there is no limitation pro viribus patrimonii).

• • Regulation of the principles of liability without obtaining the consent of the creditors

The parties

exclude certain liabilities from the subject matter of the transaction, despite their connection with the operation of the business, which does not affect the principles of liability, so that both the vendor and the purchaser continue to be jointly and severally liable on this account.

In such a situation, the parties shall regulate in detail in the business sale agreement the issues of mutual settlements for liabilities not acquired by the purchaser (as between the parties).

Usually, the issue of liability of the seller towards the buyer is the subject of detailed representations and warranties.

SummaryThe liability rules of the parties in business sale transactions provide for joint and several liability of the vendor and the purchaser, which is intended to strengthen creditor protection. Modification of the liability rules requires the consent of the creditor and is therefore possible, although not always feasible in practice. Specific regulations in contracts play an important role in determining the liability rules of the parties, but they are only internal.