Suretyship of successor companies for the debts of the divided company in a division by spin-off

The transformation of business companies is governed by Act No. 125/2008 Coll., on Transformations of Companies and Cooperatives, as amended (the “Transformations Act”). Companies transform for a variety of reasons, but the question almost always arises of what will become of the debts of the transforming company where part of its assets and liabilities passes to successor companies on the transformation, and whether the position of the company's creditors will worsen. This article examines in closer detail the suretyship of successor companies for the debts of the transforming company where a company is divided by spin-off.

The Transformations Act generally allows creditors to seek protection of their rights where the transformation of a company reduces, or may reduce, the recoverability of their claims. Where recoverability deteriorates as a result of the transformation, creditors may, for example, require adequate security to be provided, on condition that they have registered their claims not yet due within six months of the date on which the entry of the transformation in the Commercial Register became effective as against third parties. Holders of certain participating securities carrying special rights have, upon the transformation taking effect, the same rights against the successor company as they had against the issuer of those securities.

Where a company is transformed by division in the form of a spin-off, the Transformations Act allows the creditors of the divided company to seek performance of the debts from the successor companies as well. Section 257(1) of the Transformations Act governs the suretyship of the successor companies of the divided company for the debts that have remained with the divided company (and also for the debts that passed to the successor companies on the division). In a division by spin-off, part of the assets and liabilities passes to the successor companies while the divided company does not cease to exist. A division by spin-off may therefore result in a distribution of the assets and liabilities different from that within the divided company. It may happen that most of the assets pass to the successor company, while most of the debts or other liabilities not pertaining to the spun-off part of the assets and liabilities “remain” with the divided company. Plainly, the creditors' position may worsen and the recoverability of their claims decline. So that division by spin-off is not abused to “strip” assets out of a company burdened with debt, to the detriment above all of its creditors, the Transformations Act establishes the suretyship of the successor companies for the debts of the divided company. That suretyship extends not only to debts existing as at the date of entry of the division in the Commercial Register but also to debts ascertained after that entry, typically tax liabilities consisting in the additional assessment of tax for a period preceding the transformation of the company.

The successor companies stand surety for the debts of the divided company jointly and severally, up to the amount of the net business assets stated in the expert opinion valuing the spun-off part of the assets and liabilities. Where the spun-off part is valued at a considerable sum, the suretyship for the debts of the divided company (arising, for instance, from liability for damage) may be regarded as a transaction risk capable of reducing its attractiveness. For that reason it is important to consider whether to carry out the division at all and, as the case may be, which part of the assets and liabilities to spin off, having regard to the possibility that the creditors of the divided company will turn to the successor companies to have the divided company's debts performed under the statutory suretyship.

The same applies in reverse: the divided company stands surety for the debts that passed to the successor companies on the transformation, up to the amount of its own equity.