Commercial LawTransfer of Commercial Enterprise and Legal Consequences

The transfer of a commercial enterprise is the transfer of a commercial enterprise to another person as a whole, together with all the active and passive elements it contains. This is a process with much more complex legal consequences than simply handing over the keys to the shop or the shares of the company. The Turkish Commercial Code (TCC) and the Turkish Code of Obligations (TCO) specifically regulate the transfer of a commercial enterprise and stipulate a number of important obligations and responsibilities for the transferee and the transferor, especially to protect the creditors of the enterprise. The most critical legal consequence of the transfer is that the transferee becomes liable for the former debts of the business. Therefore, an entrepreneur who is considering taking over a commercial enterprise should be very familiar with the legal steps of this process and especially the scope of liability arising from debts. In this article, we will examine in detail how the transfer of a commercial enterprise should be carried out and the liability of the parties, especially the transferee, arising from the debts.

Scope and Legal Form of Commercial Enterprise Transfer (Art. 11 TCC):

• Scope of the Transfer: The transfer of a commercial enterprise shall be made “as a whole”. This means that, unless otherwise stipulated in the transfer agreement, the transfer covers the fixed assets of the enterprise (real estates, machinery), the enterprise value, the tenancy right, the trade name and other intellectual property rights (trademark, patent, etc.) and the elements of the assets that are permanently dedicated to the enterprise. In other words, the business is transferred as an active whole.
• Legal Form: Paragraph 3 of Article 11 of the TCC stipulates a strict formal requirement for the transfer:
  1. Written Transfer Agreement: The transfer agreement must be made in writing.
  2. Registration and Announcement in the Trade Registry: This written agreement must be registered and announced in the trade registry. A transfer made without complying with these formal conditions is legally invalid.

Liability for Obligations: The Most Critical Issue (Art. 202 TCO): The most important legal consequence of the transfer of a commercial enterprise is liability for debts, and this issue is specifically regulated in Article 202 of the Turkish Code of Obligations.

According to this article, the liability is shaped as follows:

1. Liability of the Transferee:

   • The person who transfers the business becomes liable for all debts of the business (existing at the time of transfer) with his/her personal assets as of the date the transfer agreement is announced in the trade registry.
   • The liability of the transferee is not valid against the creditors, even if the transfer agreement contains a clause stating “I do not assume the old debts”. Such a clause only regulates the internal relationship between the transferor and the transferee. The creditor may apply directly to the transferee for its debt.

2. Liability of the Transferor (Two-Year Joint and Several Liability):

   • The liability of the transferor of the business does not end with the transfer. The transferor continues to be jointly and severally (successively) liable together with the transferee for two years.
   • “Joint and several liability” means that the creditor may apply to the transferor, the transferee or both of them for his/her receivables.
   • This two-year period is a forfeiture period and starts to run as follows:
     • For Due (Due and Due) Debts: From the date the transfer is announced in the trade registry.
     • For Debts Not Yet Due: From the date the debt becomes due (due and payable).
   • At the end of this two-year period, the transferor’s liability ends and the transferee remains solely responsible for the debts.

Things to Consider in the Transfer Process:

• Due Diligence: Before taking over a business, the buyer must carry out a comprehensive legal and financial due diligence. All known and unknown debts of the business (tax, SSI, supplier debts, credit debts, potential litigation risks, etc.) should be examined in detail.
• Transfer Agreement: In the transfer agreement, the debts taken over should be clearly listed. In addition, it is important for the legal assurance of the transferee that the transferor gives a declaration and guarantee to the transferee that “it will be liable in the event that unknown debts arise”. Provisions such as the transferor’s guarantee to the transferee during the two-year liability period may also be included in the agreement.
• Protection of Creditors: The main purpose of this provision in Article 202 of the TCO is to protect the creditors of the enterprise. Creditors are secured by this provision against the risk that the enterprise to which they are indebted transfers its assets to someone else in order to avoid paying its debts.

The transfer of a commercial enterprise is not a simple purchase and sale transaction; it is a process of taking over the entire legal and financial past and future of an enterprise. The most critical point of this process is that the transferee becomes jointly and severally liable with the transferor for all debts of the business at the time of transfer for two years. Due to this heavy liability, it is an absolute necessity for every entrepreneur who plans to take over a commercial enterprise to obtain professional legal and financial advice, to have a comprehensive due diligence and to have the transfer agreement prepared in a way to take into account all risks, in order to protect him/her from unexpected debt burdens and legal disputes that he/she may encounter in the future.