The Liability of the Purchaser following the Acquisition of a Business that is not registered with the Commercial Register

Pursuant to § 25 of the German Commercial Code (Handelsgesetzbuch; "HGB"), a purchaser of a business is liable for the obligations of that business. This is the case irrespective of whether or not the business has been registered with the commercial register. The liability can, however, be minimized by way of careful contractual drafting.

Background

The plaintiff had purchased her husband's locksmith-business, which was not registered with the commercial register. She continued to run the business (from the same location, with a similar name and the same machines and cars) without substantial changes, serving essentially the same customers, and employing her husband as technician.

The defendant demanded payment of value-added tax from the plaintiff, which taxes had originally been owed by her husband, arguing that the plaintiff was liable for these liabilities pursuant to § 25 HGB due to the continuation of the business. The defendant issued a payment assessment, which was challenged by the plaintiff in court, with the plaintiff arguing that the business was not a 'commercial business' (Handelsgewerbe) within the meaning of § 25 HGB, since it had not been registered with the commercial register.

The Judgment of the Saxony Fiscal Court of 14 May 2014, 8 K 1833/11

The fiscal court rejected the plaintiff's claim, holding that she was obligated to pay the taxes, given that she had essentially continued her husband's business. The fact that the business had not been registered was irrelevant. Her husband's business had generated an annual turnover of EUR 250,000 and, therefore alone, was a commercial business pursuant to the statutory definition, regardless of whether or not it had been registered with the commercial register.

Comment

The judgment should encourage all business-owners whose businesses are not registered with the commercial register to reconsider whether their businesses should not be classified as commercial businesses. Experience has shown that there are many businesses that are not registered despite generating significant turnover. Many persons are under the impression that the registration of their business with the commercial register might have disadvantageous consequences, which is not, however, the case. Case law and legal literature deem a business to be a commercial business if it generates an annual turnover of EUR 250,000 or more.

A purchaser of a commercial business who substantially continues the business operations is liable for the liabilities of the business (§ 25 HGB). The plaintiff in the present matter could have excluded her liability by agreement, and by having such agreement recorded in the commercial register pursuant to § 25(2) HGB (although this is not the case as regards tax liabilities, given that these are governed not only by § 25 HGB, but also by § 75 of the German Tax Code (Abgabenordnung; AO). On account of the business not having been registered in the commercial register in the first place, however, an exclusion of liability was not even possible here in principle.

Prior to the acquisition of a business, the purchaser should consider whether an exclusion of liability is possible. If so, this alone should constitute a sufficient reason to register the business with the commercial register, so as to be able to make use of liability exclusions. In the absence of such a registration, only appropriate warranties in the purchase agreement can be of any assistance - and the hope that the seller will remain solvent.

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