If company restructuring fails to take into account transfer of liability, then the law may make a number of companies liable for the obligations of one enterprise. Thus it is important to regulate distribution of liability when planning transactions as well as reorganisation within groups.
First, solidary liability is an item to consider on division (splitting) of companies. In practice, this means that each of the companies involved in the division are held solidarily (jointly and severally) liable for the obligations of the company being divided. So, division involving transfer of assets from company A to company B must take into account that the transaction creates liability for company B as recipient for the obligations of company A as giver. Moreover, these obligations are not necessarily related to the assets delivered upon division. Since this consequence may considerably affect the financial standing of company B, prior to division company B should thoroughly assess the scope of the obligations of company A that transfer to company B.
A topical example: where a company wishes to transfer a business and during the division “shifts” it to the balance sheet of another company, the recipient company thereby acquires the obligations of the company being divided, which a buyer of the recipient company may not wish to undertake. In this case presumably the buyer will require the seller to provide security for performance of the accompanying obligations. If it is impossible to assess the scope of those obligations or if the seller cannot put up sufficient security, the buyer may decide to abstain from entering into the transaction altogether.
Another situation which entails solidary liability is transfer of a business (enterprise). Under the business transfer regulation of the Law of Obligations Act, the transferor of an enterprise and the transferee are each solidarily liable for obligations related to the business which had fallen due by the time of the transfer or will fall due within five years after the transfer. In other words, if a company decides to divest itself of a particular business, that company still remains liable to third parties for the obligations of the business equally with the transferee. This distribution of liability can be avoided only with written consent of third parties.
Since solidary liability can considerably affect a company’s financial standing, the risks involved should be taken into account on planning any restructuring. At worst, creating unjustified obligations may also involve personal liability of those who assumed those obligations, such as members of the management board.
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Distribution of liability in company restructuring
If company restructuring fails to take into account transfer of liability, then the law may make a number of companies liable for the obligations of one enterprise. Thus it is important to regulate distribution of liability when planning transactions as well as reorganisation within groups.
First, solidary liability is an item to consider on division (splitting) of companies. In practice, this means that each of the companies involved in the division are held solidarily (jointly and severally) liable for the obligations of the company being divided. So, division involving transfer of assets from company A to company B must take into account that the transaction creates liability for company B as recipient for the obligations of company A as giver. Moreover, these obligations are not necessarily related to the assets delivered upon division. Since this consequence may considerably affect the financial standing of company B, prior to division company B should thoroughly assess the scope of the obligations of company A that transfer to company B.
A topical example: where a company wishes to transfer a business and during the division “shifts” it to the balance sheet of another company, the recipient company thereby acquires the obligations of the company being divided, which a buyer of the recipient company may not wish to undertake. In this case presumably the buyer will require the seller to provide security for performance of the accompanying obligations. If it is impossible to assess the scope of those obligations or if the seller cannot put up sufficient security, the buyer may decide to abstain from entering into the transaction altogether.
Another situation which entails solidary liability is transfer of a business (enterprise). Under the business transfer regulation of the Law of Obligations Act, the transferor of an enterprise and the transferee are each solidarily liable for obligations related to the business which had fallen due by the time of the transfer or will fall due within five years after the transfer. In other words, if a company decides to divest itself of a particular business, that company still remains liable to third parties for the obligations of the business equally with the transferee. This distribution of liability can be avoided only with written consent of third parties.
Since solidary liability can considerably affect a company’s financial standing, the risks involved should be taken into account on planning any restructuring. At worst, creating unjustified obligations may also involve personal liability of those who assumed those obligations, such as members of the management board.