The Liability of the Acquiror of a Business through an Asset-Deal for its Debts and the Indicators of Case Law

legal insight

June 2023

Danae Stamargas, M.Sc.

Abstract: In a share-deal transaction (shares etc.), the entity of the business remains the same and only the shareholder changes. In the case of an asset-deal, however, we have a transfer of the individual assets of the company. This raises the question of the acquirer's liability for the debts of the business whose assets have been transferred. This article answers the question of when the acquirer of a business through an asset-deal is liable for the debts of the business through the presentation of actual cases that have been decided by the Greek judiciary.

1. Introduction - Conditions and consequences of the application of Article 479 CC

Article 479 CC provides that 'If property or a business is transferred by contract, the acquirer is liable to the creditor up to the value of the assets transferred for the debts belonging to the property or business. The liability of the transferor shall continue to exist. A contrary agreement between the parties which is detrimental to the creditors is void against them. The legal liability of the transferee of the business or group of assets is thus established, without the latter having to consent or have consented to the assumption of the debts of the transferor. The purpose of the above provision is none other than to protect the transferor's creditors, to whom the transferred property was liable, which, as an economic unit, also involves the potential for the development of the economic activity of the transferor, with a corresponding increase in the latter's financial capacity to meet its debts. Moreover, the acquirer in such cases is not seeking to acquire a single asset, but a set of assets, including the liabilities of the property or business.

The conditions for the application of the above provision are the following: a) transfer of property or an undertaking, where property in this context is understood to be the totality of rights that can be valued in money (assets of property) and an undertaking is understood to be an economic unit organised on the basis of assets (tangible or intangible, e.g. (b) debts which belong to the property or business and which already existed at the time of the transfer, at least in their origin (e.g. interest for the time after the transfer on debts which existed before the transfer, see the case of the transfer of the property or business). (c) knowledge of a transfer of a whole of property, in particular where the transfer is of a single asset which constitutes the sole or the most important part of the property or business, the creditor claiming the application of this provision must prove the relevant knowledge of the transferee (see also 2545/2003 FSA, 736/2002 AP), (d) knowledge of the transfer of a whole of property, in particular where the transfer of a single asset which constitutes the sole or the most important part of the property or business is concerned, the creditor claiming the application of this provision must prove the relevant knowledge of the transferee (see also 2545/2003 FSA, 736/2002 AP). 1384/2018 MEfthes according to which a mother third-party guarantor in a bill of exchange issue transferred to her daughter an apartment, which constituted her most important asset and for this reason the daughter was obliged to pay the amount of the bills of exchange to the issuer).

The consequence of the above conditions is a joint and several liability between the transferor and the transferee for the debts of the property or business which had been incurred up to the transfer. In fact, the transferor continues to be liable without limitation and the transferee only up to the value of the assets transferred at the time of the transfer. Thus, the creditor can selectively sue both of them together, simultaneously or successively, or whichever one he chooses (1384/2018 MEfthes).

2. Legal Indicators

In the context of the above provision and in order to assess whether it is possible to apply it in each case of transfer of a business, the Greek courts consider the following elements to be decisive: "1) transfer or not of tangible assets (buildings, machinery, etc.), 2) transfer or not of intangible assets and their value, 3) employment or not of a significant part of the workforce of the transferred business by the new entrepreneur, 4) transfer or not of the clientele, 5) degree of similarity of the activities carried out before and after the transfer and 6) duration of the eventual interruption of these activities" (56/2022 Efath, 1850/2006 AP Mr. ά.). On occasion, the courts of our country have gone further in providing some more specific indications, which support the existence of a transfer of an undertaking, resulting in the joint liability of the transferor and the transferee by law. Some of these indicators are set out in more detail below:

- The common corporate purpose of the transferor and the transferee, the use of the same premises, even the same telephone number, the integration of both companies (transferor and transferee) under the franchise system into the same network of outlets, the transfer from one company to the other of all the transferor's goods and equipment and intangible assets (brand, distinctive signs, reputation, know-how, organisation and clientele) and the parallel operation of the two businesses within the same super market store for a period of more than one year, are referred to in the Commission's Decision No. 9112/2020 BIRATH as indications that led to the affirmation of liability of the newly established (acquiring) company for the debts of the dissolved (transferring) company under Article 479 CC.

- In any case, according to the case law, the basic criterion for establishing the transfer of an undertaking is the following: the transferred undertaking or holding must retain its identity under the new entity (see 9112/2020 MAPAθ, 711/2011 EfAθ, 1850/2006 AP, etc.). In this context, the 1850/2006 AC held that 'The identity of the business is not altered by the fact that the successor has added new elements to the transferred assets (new machinery, facilities, hired new personnel, partially modified the purpose, e.g. expansion of operations, production of new products, etc.). A long interruption in the operation of the business may change the identity of the business, because in this case the organisation, the clientele, the reputation disappear. However, apart from the interruption, other elements must be taken into account in order to establish whether there is a transfer of an undertaking. Temporary cessation does not, as a rule, change the identity of the undertaking'.

- A transfer of customers is a transfer of a business, since customers are the central component of the business, without which it cannot function, when they are the sole or main component of the transferred business. The above was held in the judgment of the Court of Justice in Case No. 496/2021 FPC, according to which, in addition to the transfer of medical equipment from the transferor company to the transferee, and the recruitment of the former's staff by the latter, "the reputation and clientele of the aforementioned orthopaedic clinic were transferred to the defendant in the second action, intangible assets which nevertheless have a significant commercial value and constitute the core of the economic unity of the undertaking, given that it is one of the oldest orthopaedic clinics in the city of Patras (1969) which had created a significant circle of customers and a commercial reputation and loyalty [... From all the above it has been clearly established that the business of . ..clinic operated by the company "........" from 2014 onwards was transferred as an economic unit to the defendant in the second action, and its value exceeds the value of its assets supported by the latter on the basis of the balance sheet of 2014 (EUR 545,863.50), since the value of its clientele, reputation and commercial loyalty, which formed the core of the business, is not included in it. Similar judgments were also made in the 1463/2022 FSA according to which "In case of doubt, the transfer of the clientele will also mean the transfer of the business, especially when the transferor of the clientele closes his business, because the clientele is the central component of the business, without which it cannot function" (see also 295/2020 MEfthes). It is also possible for provision 479 of the CC to be applied even without the transfer of the whole business but with the sale of the 'air' of the business as its most important element (see 960/2006 F.E.P.R.). This is particularly the case in cases of shop leasing where, in addition to the payment of the rent, a consideration is agreed upon for the sale of the 'air' of the business (reputation, clientele, etc.).

- The 'spin-off' or 'spin-off' of an industrial branch of a multi-branch company and its contribution to an operating or firstly constituted joint stock industrial company, which is carried out in accordance with the common rules of special succession, results in the application of Article 479 CC for the protection of corporate creditors. The above was held in the case of the Court of First Instance in Case No 1154/1998, where the pharmaceutical and cosmetics branch of an undertaking was spun off and transferred to a newly established industrial company to which the facilities, equipment and raw materials used by the spun-off industrial branch of the original undertaking were transferred at the same time, with the result that the newly established company, to which the pharmaceutical and cosmetics branch of the first undertaking was transferred, was also liable for the debts of the original undertaking. Similar judgments are also contained in the judgment of the Court of First Instance No 736/2002 and in the judgment of the Court of First Instance No 1470/2020.

- "The sale of an undertaking should be assimilated to the sale and transfer of all the shares of a capital company or partnership which is the vehicle of an undertaking and the acquisition of the majority of the shares, so that the company can be controlled and its articles of association can be amended, without the need for the transfer of the undertaking's assets", as held by the judgment of the Court of First Instance of the European Communities in Case No.  3704/2017 PPRATh, according to which "the company is acquired by the acquirer through the acquisition of all or a majority of the shares or shares of the company".

- MEFTHES No. 1083/2021 held that a transfer of business also constitutes a constructive business lease agreement, which "had as its sole purpose, on the one hand, the continuation of the commercial activity of the financially failing first defendant by the financially sound appellant company ... and, on the other hand, the avoidance of payment of all those outstanding debts that the first defendant had to its various creditors, including the plaintiff ...". Therefore, the above judgment concludes: 'Since all the above evidence shows that the first defendant transferred by way of a gift (without payment of any consideration) the assets of its business as organised and structured, as a single economic and property entity (commercial stock, clientele, organisation, distinctive title and other distinguishing marks, commercial loyalty and reputation worth at least EUR 1 000. 000), to the second defendant and already defendant company, which had been carrying on a related business activity in the Naples area for years, then the latter cumulatively and legally assumed all the debts of its franchisor, including the debt of EUR 59 690 owed to the plaintiff, which was not disputed by the first defendant acquiring company, both in terms of the total amount and the legal amount of each individual sale. Therefore, the requirements of Article 479 of the Code of Civil Procedure are met and the defendant is itself liable to the plaintiff for the payment of the sum of EUR 59 690, due to the cumulative assumption of the debts of the transferred business, whereas at the time of the above informal transfer it (the defendant) was fully aware, and in any event could in view of the specific circumstances have been aware, that it was acquiring the whole or at least the major part of that business'.

- According to the 545/2015 ΕφPir, the transfer of a ship of a "mono-capital" shipping company constitutes a transfer of a business within the meaning of Article 479 CC, as "the transferee was aware of the general financial situation of the transferor and could understand that the property transferred to it constituted the whole or the major part thereof".

3. Cases of non-application of the provision

Finally, it is argued that this provision does not apply where the transferred property, despite being the most important element of the debtor's assets, is subject to charges in excess of its value. The above was held in No. 261/2015 FPC "given that, property, within the meaning of the above provision, is understood to be only its assets, i.e. what remains after the deduction of liabilities" (cf. and 1828/2014 AP according to which "... the transferred properties, which had encumbrances in excess of their value, did not constitute property within the meaning of Article 479 CC and therefore the acquiring defendant is not liable to the plaintiff up to the value of the properties transferred by the plaintiff"). Similarly, it is argued that if there are transfers of the separate assets to different persons and these transfers exhaust the property of the transferor, again the said provision does not apply, unless most of the transfers are a contrivance to circumvent the regulation. The latter was ruled by SC No. 909/2010, according to which CC 479 does not apply "when the whole of a property or business is transferred in parts to several different persons, unless those acquiring are aware of this, i.e. that the several contracts were made with the same purpose of transferring the property, in which case the liability of each of them is limited in proportion to the part of the property they acquire" (so also SC 1228/2014, 1995/2014).