Lawyer explains: How to recover debt from a company that has ceased operations?

  • 2024-03-21

When dealing with a financially troubled company, negotiations to settle the debt should be initiated as early as possible, and compromises should be sought if possible. However, even if the indebted company has ceased its operations and its debts have been sold off to "undertakers" to escape them, it does not mean that the debt should be written off, explained lawyer Kaire Sepper from the law firm Hedman.

A common strategy for escaping debts is to sell the company to a so-called undertaker with the aim of liquidation. However, owners immediately establish a new company, continuing business activities as if starting anew. "In reality, a 'clean slate' may not exist, and the new company may remain responsible for the obligations of its predecessor," explained lawyer Kaire Sepper from the law firm Hedman.

To recover the debt, the creditor must prove that there has been a transfer of enterprise.

"The law establishes joint liability of the transferor and transferee of the company, meaning that upon the transfer of the company, all obligations pass to the transferee. The purpose of this is to prevent a situation where an entrepreneur disposes of part of the company's rights under unfavorable conditions, thereby creating an inability to fulfill the company's obligations," said Sepper. In case of a transfer, joint liability applies to both existing obligations and those that become due within five years after the transfer.

To identify the transfer of a company, the lawyer from Hedman recommended considering both the bigger picture and assessing the characteristics typical of a transfer. For example, indications of a transfer include when the new company operates in the same field, uses the assets of the old company, and employees or customers have transitioned to the new company.

The Supreme Court has found that each dispute and case is different, and there cannot be specific conditions for identifying a transfer. "For example, if a significant member of the management of a one-person company, such as a director or project manager, has 'moved' to the new company without significant capital contribution, this can be considered a transfer of the company. It is not necessary for the circle of shareholders of the company to match; it is important that through individuals, the transfer of business knowledge and customer network of the company is ensured. In another company, the trademark may be important, while in a third, it could be the equipment," Sepper provided examples from Estonian court practice.

Another indication of the transfer of a company is if the new company continues to use the domain, website, and social media (Facebook, Instagram etc) accounts of its predecessor, or minimal changes have been made to them. Namely, these are considered the intellectual property of the company, and if it has been transferred to the new company, it may be a transactional transfer.

In the case of a company transfer, the new company is indeed responsible for the old obligations. "Understandably, there is no company transfer if a debt-ridden company was engaged, for example, in car repair, while the new one starts as a beauty salon," clarified the lawyer from the law firm Hedman.

The Estonian Tax and Customs Board also monitors transfer schemes, and when identified, the tax debt of a discontinued business is transferred to the new company. "Creditors should also boldly adopt the same practice and present their claims to new companies," Sepper advised, adding that the Ministry of Justice has also set a goal to amend the law to limit the establishment, management, and ownership of problematic companies in the future.

However, for now, the lawyer from Hedman advised starting negotiations immediately with a financially troubled company to settle the debt, find a compromise, or resort to legal action with a lawsuit or bankruptcy petition. But if the indebted company has been sold to "undertakers," it is worth analyzing whether the transfer of the company may have taken place and file a claim against the new company.

The law firm Hedman, specializing in business and company law, supports its clients in raising investments, organizing shareholder and stockholder relationships, technology law, mergers and acquisitions, cross-border movements of companies, IT law, and data protection and intellectual property matters.