Liability of a purchaser of a Polish company (partnership) depending on the type of company (partnership) being purchased

One of the crucial issues for both the investor and the seller in any transaction is to regulate the seller’s liability for the company (partnership) acquired by the investor. This can pose particular difficulties when purchasing a foreign company (partnership), governed by foreign laws.

The terms and conditions under which the parties to the transaction will be held liable for the company (partnership) are primarily determined by the method of sale chosen by the parties. As a rule, Polish law provides for three possibilities for taking over a business:

1.       sale of an enterprise or its organised part – for any company or partnership,

2.       sale of shares – for companies (i.e. a limited liability company, a simple joint-stock company, limited joint-stock partnership and a joint-stock company),

3.       sale of all rights and obligations – for partnerships (i.e. general partnership, limited partnership and limited joint-stock partnership).

Sale of an enterprise

An enterprise is an organised set of intangible and tangible assets held for the purpose of conducting business activities (including, in particular, the business name, ownership of its assets, contractual rights, cash, all licences, permits and other administrative decisions, business secrets, books and documents relating to business activities). To put it simply, an enterprise means a business, the economic activity of a given company. Thus, it is possible, in a sense, to buy a company’s business – its movable and immovable property, money, name, employees, etc. – without buying the company itself.

When purchasing the enterprise of a Polish company or partnership, the purchaser is jointly and severally liable with the company (partnership) for debts related to the operation of the acquired business. Importantly, this applies to both civil and public law (e.g. tax) obligations. However, the buyer’s liability is not unlimited. First, the investor is not liable for obligations of which they were not aware at the time of acquiring the business despite exercising due diligence; therefore, a purchaser should carry out a scrupulous due diligence analysis and obtain the relevant official certificates. Secondly, the investor’s liability is limited to the value of the acquired enterprise, meaning that, as a general rule, the purchaser cannot be required to pay more than the value of the enterprise purchased.

Note that it is also possible for an investor to purchase only specific assets of a given company (partnership), which will obviously limit the purchaser’s liability and, at the same time, will not lead to the acquisition of the entire business.

Sale of shares

Shareholders of Polish companies do not bear personal liability for the company’s obligations. Consequently, an investor acquiring shares in a existing limited liability company or joint-stock company will not be liable with their assets for the company’s debts. Although the purchaser does not bear personal liability for the company’s debts, they may lose out on the company’s purchase. The value of the purchased company may prove to be much lower in reality due to, for example, hidden liabilities and other unidentified risks. Moreover, the shareholders, although not liable to third parties, may have liabilities towards the company itself. If shares are sold by a  shareholder with such liabilities, the purchaser is jointly and severally liable with the shareholder for their non-satisfaction. Therefore, the purchase of companies almost always involves a due diligence process and a number of other agreements to secure the purchaser.

Sale of a partnership

In Polish partnerships, the partners are usually liable with their personal assets for the partnership’s obligations (the exceptions are limited partners in a limited partnership and shareholders in a limited joint-stock partnership). Importantly, not only those persons who were partners at the time of incurring the obligation are liable for the partnership’s obligations, but also the partners who acquired all the rights and obligations in the partnership at a later date. This means that an investor who has acquired all the rights and obligations of another partner in a partnership is jointly and severally liable for its obligations with the previous partners who incurred the obligations in question.

Transaction documents

Whatever the legal form of the Polish company (partnership) being sold and the manner in which the transaction is conducted, the terms of the seller’s liability are essential for each party. Therefore, the parties to the transaction often do not limit themselves to the rules established by Polish law and conclude additional transaction documents, including internal contracts and agreements, with extensive statements and assurances of the sellers as to the company’s (partnership’s) condition, regulating liability for obligations incurred prior to the sale. The general rule regarding the scope of the seller’s liability is that the seller is liable for all identified and “hidden” adverse events that occurred prior to the sale of the company or partnership, while events occurring after the date of the sale are the sole responsibility of the investor.

Note also that insurance offers for the sale of a company or partnership are already quite widely available on the market. These are both insurance policies for the purchaser, in the event that the purchase of the company (partnership) brings them a specific loss, and for the seller, against liability for the truthfulness of their representations and warranties, should they unknowingly tell untruths.