If my company buys another company’s assets, are we liable for the seller’s debts?

When you buy the assets of a company, you don’t buy their stocks or shares; you’re buying everything from company vehicles to office staplers. A big part of these transactions is that normally the buyer doesn’t take the seller’s debts. However, there are four exceptions where the buyer might take on debts. Courts will look at the deal structure to determine if any of these exceptions apply.

The most common exception is that the buyer agrees in the purchase contract, expressly or impliedly, to take some or all seller debts (2010, U.S. Automatic Sprinkler). When negotiating the asset purchase agreement, you decide whether you’re taking on part, all, or none of the seller’s existing debts. That can be stated outright, or be implied by the nature of the contract. Courts will determine what the contract means.

In fact, it’s more common for buyers to add clauses to these agreements expressly refusing any liability for the seller’s debts. Courts tend to not find an implied assumption in those cases. In Sprinkler, for example, the contract excluded any liability from breaches before closing.

The buyer might also have the burden of taking over employment agreements from the seller. In Winkler v. V.G. Reed (1994), the buyer expressly said they wouldn’t take on the seller’s obligations from an employment agreement. Courts look at each agreement individually, so always read yours.

Badges of Fraud

The second exception happens if the deal is fraudulent or done to escape debts. Courts will also look at “badges of fraud” — where it looks like the seller is deliberately trying to cheat a creditor out of money. This can happen when a seller transfers assets to a buyer during a pending lawsuit, leaves the seller insolvent, strips the seller of their assets through a series of deals, conducts the deal secretly or in haste or, for reasons unknown, deliberately does a strange deal (Creech, 1996). If any of these badges or other indications of fraud exist, buyers may be liable for certain debts.

”De Facto” Merger

The third exception applies if there’s a “de facto” merger. De facto means that despite what the paperwork says, this deal will operate like a merger and courts should treat it as such. In Indiana courts look for 4 things: the buyer has the same owners as the seller; its run by the same managers and staff in the same way; the seller stops and dissolves; and the buyer takes the debts that are necessary to keep the business running. Using the stock of the purchasing company to buy the seller’s assets as part of the deal can be key in finding a “merger.” Paying all cash makes the deal look more like a true asset sale, so the seller is more likely to be stuck with their own debts. If a court finds that a “de facto merger” took place, the buyer takes on the seller’s debts as part of the deal.

The So-called “Mere Continuation” Rule

The fourth exception is the so-called “mere continuation” rule: the deal isn’t really a “new” company. It’s just the same seller masquerading under a different name. Indiana will look for: (1) a continuous corporate entity, not a continuous business; (2) if the same officers, directors, and stockholders control the buyer; and (3) if only the buyer remains after the deal. Courts focus not on whether two companies do similar business or sell similar products, but whether the company has the “same feet on the ground”: the same officers, shareholders, and directors. The seller’s debts may stick to the buyer. It happens where the buyer is basically just the seller in a different hat (2002, Patin v. Thoroughbred Power Boats).

Using the seller’s trade name is often not enough, but it does play a role and can be important. If the buyer uses it, and could be considered the same as the seller in other ways, that can add up to the buyer taking on the debts. If you plan to use the seller’s branding or files in any way, be ready for questions. As to the last part of test, State Farm v. Main Bros. Oil (2012) says it just needs one company left. The name was sold, the company stopped operating, but it never fully dissolved. That was not enough for a “mere continuation.” Finally, if after the deal the seller isn’t even a legal entity anymore, the deal might be a “mere continuation” and you may end up taking on seller debts. That didn’t happen in Main Bros. Oil because the company was still a “live” entity under the law.