You might be wondering…

“Once I sell the enterprise, am I free of all debts?”
“As a buyer, am I risking taking over unknown liabilities?”
“Can creditors go after both the buyer and the seller at the same time?”

Clients often ask me…

“I’m buying a long-established business – how do I find out which debts I’m actually taking on?”
“As a seller, I want to be sure that creditors won’t keep bothering me. Can the guarantee be contractually limited?”

What the law says in a nutshell

• Section 2177 of the Civil Code:

  • The buyer takes over the enterprise as a whole, including debts they knew or should have known about.

  • The seller guarantees these debts.

• This means creditors can choose whether to pursue the buyer (as the principal debtor) or the seller (as guarantor).

• The purpose is to protect creditors from losing their rights due to the transfer of ownership.

Practical impact of the rule

• Buyer: must be prepared to assume debts – thorough due diligence is essential.

• Seller: remains liable as guarantor even after selling the business, until debts are settled.

• Creditor: has flexibility in deciding whether to pursue the buyer, the seller, or both.

Common mistakes in practice

• Buyers underestimate due diligence and only later discover substantial liabilities.

• Sellers wrongly assume that selling the enterprise wipes away their debts.

• Parties fail to agree in the contract how to handle disputed or unknown liabilities.

How to proceed correctly

1. Due diligence: review accounting records and liabilities carefully before purchase.

2. Contractual provisions: include guarantees and mechanisms to handle disputed or hidden debts (e.g., price reductions).

3. Creditor notification: inform creditors about the transfer – transparency reduces the risk of lawsuits.

4. Financial reserves: sellers should prepare for the possibility that creditors may still pursue them.

Real-life examples

• A buyer acquired a company only to later learn of outstanding supplier debt. The supplier sued both the buyer and the seller.

• A seller remained liable for a debt the buyer did not know about. Because the buyer became insolvent, the seller had to pay part of the debt.

Why “unknown debts don’t matter” is a myth

Neither the sale of the enterprise nor contractual arrangements between the buyer and seller can fully exclude the seller’s guarantee towards creditors. Creditors are not parties to the sale contract, and the law protects them. That is why guarantees and indemnities between the parties are critical.

Lawyer’s recommendation

For buyers: insist on a detailed audit and contractual guarantees.
For sellers: expect that full release from liability to creditors is impossible, but you can set up fair reimbursement arrangements with the buyer.

FAQ

Who is responsible for debts after a business acquisition?
The buyer is the principal debtor, but the seller guarantees the debts.

Can creditors demand payment from both parties?
Yes, creditors may pursue either the buyer, the seller, or both.

Can the seller’s guarantee be excluded by contract?
No, not towards creditors. However, internal settlement between the buyer and seller can be arranged.