Company Sale: Limited Opportunities, Unlimited Liability - Hungary
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With the amendment of the Bankruptcy Act of Hungary, from 1 March 2012 the legislator has significantly expanded the scope of such circumstances when the unlimited liability of the former shareholder of a company can be established. The present article wishes to highlight those circumstances when the unlimited liability of the former shareholder of a company can be established and the ways how such liability can be avoided.
1 Circumstances When the Unlimited Liability can be Established
Pursuant to the wording of the Bankruptcy Act effective from March 2012 the liability of the seller can be established for the debts of a company under liquidation provided that the seller had a majority control over the company and sold such interest in the period of 3 years before the commencement of the liquidation. In such case the court can establish the liability of the former shareholder for the debts of the company that have not been settled during the liquidation procedure, except if the former shareholder can prove that any of the exemptions from such liability (to be discussed later) apply.
It is to be noted that the rule establishes the seller’s direct and unlimited liability towards the creditors of the company irrespective from the fact that the seller might not have connection with the company any longer. While, on one hand, this rule creates an exception to the general principle of limited liability of the shareholder for the debts of the company, on the other hand, it may result in unexpected and inequitable business situations.
2 Ways to Get Exemption from the Liability
The former shareholder can be exempted from the unlimited liability if it proves that at the time of the sale the company was still solvent and its debt got accumulated after the sale took place. The seller can also be exempt if, at the time of the sale, the target company was threatened by insolvency or was insolvent but the former shareholder acted in good faith and took into account the interests of the creditors during the course of the sale.
The risk that the liability of the former shareholder will be established does not appear to be high if the company was solvent at the time of the sale. In such case it is highly suggested that the former shareholder shall obtain the financial statements of the company as of the date of the acquisition, accompanied with all other documents that can evidence the financial situation of the company and it shall keep such documents for a period of 3 years.
It is not uncommon though to conclude such M&A transactions where the target company is insolvent or is threatened by insolvency. In such a case the risk that the liability of the former shareholder can be established in the future is substantially higher. The former shareholder can, in such case, avoid this risk only if it can prove that, on one hand, it acted in good faith during the transaction and, on the other hand, it took into account the interests of the creditors of the company. It can be uncertain, however, under what circumstances can the seller and the purchaser act in good faith during the sale and purchase of an insolvent target company. If the former shareholder can prove that the insolvency of the target company is not attributable to it and the declared objective of the purchaser is the reorganisation of the target company then such a transaction may probably be considered a good faith deal. Situations in life are, however, usually not as black and white as that. Moreover, even if it can be proven that the parties acted in good faith, the former shareholder still needs to prove that it took into account the interests of the creditors during the course of the acquisition. It is even more problematic how this can be evidenced. In itself, it is questionable in what way a company acquisition serves or jeopardises the interests of the creditors of the target company. Further, the question arises, what do the seller and the purchaser need to do during the course of the acquisition to prove that they considered the interests of the creditors. This will, in any event, necessitate the preparation of additional documents during company acquisitions.
3 Summary
The new rules of the Bankruptcy Act necessitate that parties of an M&A transaction pay attention to the potential post-closing liability of the seller. In order to avoid such liability it is advised that the seller shall collect the necessary documents evidencing that the target company was solvent at the time of the acquisition. Particular attention needs to be paid in such circumstances when the target company is insolvent or threatened by insolvency at the time of the acquisition. In such case the seller can only avoid its liability if it proves that it acted in good faith and in the interest of the creditors. As the new liability rules are only applicable to the direct owners of the target company sellers can also avoid such post-closing liability by a pre-acquisition restructuring of the ownership situation in the target company.
AUTHOR: Pál Jalsovszky
Copyright Jalsovszky Law Firm
More information about Jalsovszky Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Pursuant to the wording of the Bankruptcy Act effective from March 2012 the liability of the seller can be established for the debts of a company under liquidation provided that the seller had a majority control over the company and sold such interest in the period of 3 years before the commencement of the liquidation. In such case the court can establish the liability of the former shareholder for the debts of the company that have not been settled during the liquidation procedure, except if the former shareholder can prove that any of the exemptions from such liability (to be discussed later) apply.
It is to be noted that the rule establishes the seller’s direct and unlimited liability towards the creditors of the company irrespective from the fact that the seller might not have connection with the company any longer. While, on one hand, this rule creates an exception to the general principle of limited liability of the shareholder for the debts of the company, on the other hand, it may result in unexpected and inequitable business situations.
2 Ways to Get Exemption from the Liability
The former shareholder can be exempted from the unlimited liability if it proves that at the time of the sale the company was still solvent and its debt got accumulated after the sale took place. The seller can also be exempt if, at the time of the sale, the target company was threatened by insolvency or was insolvent but the former shareholder acted in good faith and took into account the interests of the creditors during the course of the sale.
The risk that the liability of the former shareholder will be established does not appear to be high if the company was solvent at the time of the sale. In such case it is highly suggested that the former shareholder shall obtain the financial statements of the company as of the date of the acquisition, accompanied with all other documents that can evidence the financial situation of the company and it shall keep such documents for a period of 3 years.
It is not uncommon though to conclude such M&A transactions where the target company is insolvent or is threatened by insolvency. In such a case the risk that the liability of the former shareholder can be established in the future is substantially higher. The former shareholder can, in such case, avoid this risk only if it can prove that, on one hand, it acted in good faith during the transaction and, on the other hand, it took into account the interests of the creditors of the company. It can be uncertain, however, under what circumstances can the seller and the purchaser act in good faith during the sale and purchase of an insolvent target company. If the former shareholder can prove that the insolvency of the target company is not attributable to it and the declared objective of the purchaser is the reorganisation of the target company then such a transaction may probably be considered a good faith deal. Situations in life are, however, usually not as black and white as that. Moreover, even if it can be proven that the parties acted in good faith, the former shareholder still needs to prove that it took into account the interests of the creditors during the course of the acquisition. It is even more problematic how this can be evidenced. In itself, it is questionable in what way a company acquisition serves or jeopardises the interests of the creditors of the target company. Further, the question arises, what do the seller and the purchaser need to do during the course of the acquisition to prove that they considered the interests of the creditors. This will, in any event, necessitate the preparation of additional documents during company acquisitions.
3 Summary
The new rules of the Bankruptcy Act necessitate that parties of an M&A transaction pay attention to the potential post-closing liability of the seller. In order to avoid such liability it is advised that the seller shall collect the necessary documents evidencing that the target company was solvent at the time of the acquisition. Particular attention needs to be paid in such circumstances when the target company is insolvent or threatened by insolvency at the time of the acquisition. In such case the seller can only avoid its liability if it proves that it acted in good faith and in the interest of the creditors. As the new liability rules are only applicable to the direct owners of the target company sellers can also avoid such post-closing liability by a pre-acquisition restructuring of the ownership situation in the target company.
AUTHOR: Pál Jalsovszky
Copyright Jalsovszky Law Firm
More information about Jalsovszky Law Firm
View all articles published by Jalsovszky Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
