Beware the pitfalls of transferee liability when making purchases
When considering purchases in Poland, a buyer needs to realize that a seller's liabilities may become his or her responsibility under the principles of transferee liability.
While buyers aren't liable in all cases, such as when buying stock in a Polish entity - in which case the company retains liability and not the new shareholder - there are many instances where buyers of assets in Poland can become personally responsible for liabilities in the areas of tax, civil, environmental, tort, and labor law, or for the commercial debt or contractual obligations of the seller. In this article, I will limit myself to covering only the transferee-liability rules applicable to the seller's civil law liabilities and tax liabilities. A separate set of rules regulating transferee liability with regard to mergers will be discussed in this column in the future.
Polish law generally characterizes an asset acquisition as an acquisition of 1. przedsiębiorstwo (enterprise), 2. its organized part, or 3. of a particular single asset or group of assets. The term przedsiębiorstwo is defined generally, if imprecisely, as the group of assets capable of functioning as an independent economic unit, and identifiable as being separate from its owner.
As a general rule, the buyer of assets in Poland will become liable for the seller's liabilities, if the assets purchased constituted a przedsiębiorstwo. The problem is that if you are purchasing assets, you cannot always be certain that what you are buying does not constitute przedsiębiorstwo, since the definition of the term is generally vague. This vagueness can result in the administrative and judicial authorities using differing definitions of przedsiębiorstwo.
It is clear then that the definition of a przedsiębiorstwo is crucial from the perspective of an asset buyer, as only if the buyer knows whether the assets purchased constitute a przedsiębiorstwo can the potential for transferee liability be ascertained. However, some basic questions in this area can have surprising (or conflicting) answers, often depending on the specific circumstances. For example, it is not entirely clear whether a Polish limited-liability company can have more than one przedsiębiorstwo.
With regard to the civil-law liabilities of the seller, the civil code mandates that a buyer of a przedsiębiorstwo can become jointly and severally liable for the seller's civil-law liabilities attributable to the operation of such a przedsiębiorstwo. Of course, the seller remains primarily liable in such case for civil-law liabilities. Fortunately, the buyer can insulate himself from the seller's civil-law liabilities by conducting a reasonable due diligence. If a due diligence does not reveal such civil law liabilities, the buyer generally will not become liable for the seller's civil liabilities. In any event, the civil-law liability of the przedsiębiorstwo buyer is limited to the value of the przedsiębiorstwo, but it should be noted that its value may not necessarily equal the price paid.
The rules are somewhat different with regard to the seller's tax liabilities. The buyer of a przedsiębiorstwo will be responsible for the seller's tax liabilities relating to the economic activities under which it purchased the enterprise, up to the value of the przedsiębiorstwo purchased. Also, the buyer purchasing a fixed asset worth more than zł. 13,283, or an organized part of a przedsiębiorstwo, will be so liable, subject to the upper liability limit derived at by comparing the value of such fixed asset or organized part in relation to the value of the entire enterprise. The biggest difference in the treatment of tax liabilities vs. civil-law liabilities for purposes of transferee liability is that whereas a reasonable due diligence failing to reveal civil-law liabilities is enough to protect the buyer from a seller's civil-law liabilities, the due diligence will not give the buyer protection with regard to the seller's tax liabilities.
It is also foreseeable that the definition of przedsiębiorstwo could be different for tax purposes and for purposes of the civil code. In other words, you may end up buying a przedsiębiorstwo for tax purposes, but not for purposes of the civil code. In this regard, because the tax consequences of a purchase often depend on whether what is purchased constitutes a przedsiębiorstwo, tax authorities can have an incentive to interpret the definition of przedsiębiorstwo in a manner resulting in higher taxes - occasionally indirectly impacting on transferee liability issues. Indeed, there was some old authority that environmental liabilities should be treated as tax liabilities; so clearly the current state of law allows some room for interpreting the rules in a manner favoring the tax authorities, and the widening of the potential transferee liability of buyers, because in such case a buyer could become liable for seller's environmental liabilities under the principles of tax law.
Fortunately, there is a way to limit the buyer's exposure to the seller's tax liabilities when buying a przedsiębiorstwo, its part, or a fixed asset. It requires requesting an appropriate revenue office (with the seller's consent) to issue a certificate listing the tax obligations of the seller. If you have this certificate and further tax liabilities are revealed in the future, you will still be liable only for the obligations listed on the certificate.
In sum, under the transferee liability principles, there is some potential exposure to a seller's liabilities if purchasing assets in Poland. To address this potential exposure, a buyer needs to draft carefully the purchase agreement, and depending on the facts, insist on an escrow, conduct a reasonable due diligence, or ask for a tax certificate. The rules may look confusing (even to lawyers), but there are many ways to minimize the potential exposure. On the bright side, I must note that the Polish jurisprudence has yet to develop the concept of a de facto merger occasionally used in the United States to impose transferee liability on unsuspecting purchasers of corporate shares.
The author of this article Władek Rzycki is an attorney with White & Case W. Daniłowicz, W. Jurcewicz i Wspólnicy - Kancelaria Prawna sp.k.
