GV Lawyers would like to present you an article by Paralegal Tran Nguyen Phuong Anh titled “Who Pays “Old Debts” After M&A?” which was published in Saigon Economic Times on 08 July 2021.
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May a company be released from the payment obligation for its debts by changing the shareholders and the company’s name? Who will be responsible for the debts the company had before an M&A deal?
“Old debts” – one of the typical post-M&A disputes
In early 2021, Chairman of the Hanoi People’s Committee requested relevant agencies to inspect Minh Quan High Technology Development and Investment Joint – Stock Company (Minh Quan Company) in respect of the collection and transportation of waste in Nam Tu Liem District. Now, Minh Quan Company once again has its name called out because it has not paid salaries to more than 200 waste collectors since July 2020. In fact, Minh Quan Company has changed its name to Nam Ha Noi Group Joint Stock Company (Nam Ha Noi Company) since November 2020. Ms. Tran Thi Bich, a representative of Nam Ha Noi Company, confirmed that she knew about this pay-related debt through accounting books when buying shares of Minh Quan Company in early 2021. However, Ms. Bich said that this debt was the liability of the old company, and she did not know what Minh Quan Company had done before. However, so far, Nam Ha Noi Company has advanced VND500 million to pay workers salaries and pledged to pay the balance before 10 July 2021.
From the said information, we can see some important points: (i) there has been a sale and purchase of shares (M&A) within Minh Quan Company; (ii) the pay-related debt was recognized by the buyer as a liability of the old company before the M&A; and (iii) the target company (Minh Quan Company) changed its name to Nam Ha Noi Company. These events give rise to a number of legal issues: Will the change of shareholders and the company’s name release the company from the liability to pay its debts? Who will be responsible for the debts the company has had before the M&A?
You may change an enterprise’s name and owner, except the enterprise itself
One of the reasons for delaying payment of salaries is that Minh Quan Company changed its shareholders and also its name after the M&A. In this regard, we should make clear that the obligation to pay salaries lies with Minh Quan Company in the capacity of an employer and a legal entity independent of its shareholders. A change in the company’s shareholders will not change its status as an employer in the relationship with employees, and therefore, the company will not be released from the payment obligation.
Similarly, changing the name does not result in changing the legal status of Minh Quan Company, more specifically, the enterprise code remains the same as when the company was with its old name. Decree 01/2021/ND-CP guiding enterprise registration clearly stipulates that: “Changing an enterprise’s name does not result in changing the rights and obligations of such enterprise”.
In short, from the legal perspective, despite the fact that Minh Quan Company has changed its name to Nam Ha Noi Company or changed its shareholders, the obligations of Minh Quan Company (now is Nam Ha Noi Company) remains unchanged.
Debt settlement in M&A must be clear from the beginning
It is worth noting that this pay-related debt is related to the M&A transaction between the old shareholder (seller) and the new one (buyer) of Minh Quan Company. The enterprise’s debts are often a source of dispute in M&A transactions. Often, disputes will arise when the seller conceals debts, and the buyer only finds out these debts after taking over the company. In this case, according to what Ms. Bich said, the pay-related debt was shown in the accounting books of Minh Quan Company; this means the debt has been incurred prior to the transaction and was disclosed to the buyer.
When the old shareholder (seller) sells shares to the new shareholder (buyer), in principle, debts of the company do not affect the interests of the seller because the seller sells his shares and receives money from the transfer, but the seller does not sell assets of the company. However, the company’s debts will cause the share price to decrease, and the buyer will usually request the seller to reduce the share price corresponding to the amount of debts.
Of course, although the company’s debt is independent of the seller’s obligations, the parties to an M&A transaction can agree on how to handle this payroll debt if they so desire. Usually, the parties will require the seller to pay the pay-related debt on behalf of the company before completing the M&A transaction. Since the seller pays the debt on behalf of the company, the company owes the seller the money paid on its behalf – at this point the company becomes a debtor to the seller (the old shareholder.) Therefore, in order to avoid troubles between the company and the old shareholder, in some cases, the seller (the old shareholder) agrees to write off this debt for the company to “cut off” the relationship between the parties after the seller hands over the company to the buyer.
We do not know if there are similar agreements between new and old shareholders of Minh Quan Company or not; if the parties have such an agreement, that agreement will be used for settlement. The fact is that the pay-related debts have not yet been paid to the workers. Therefore, Minh Quan Company, now Nam Ha Noi Company, is still the entity that must bear the liability for paying salaries to its workers.
