Change of ownership of companies and the effect on existing liabilities

Change in ownership of companies has been a constant development in the corporate space in Ghana. A recent significant acquisition in the telecommunications sector is the change of the brand name of Vodafone Ghana to Telecel Ghana.

Reasons that may account for change in company ownership include global expansion, reduction of risks, injecting more capital into the business, unexpected death of an owner, succession planning among others.

In doing business, companies may incur liabilities resulting from loan agreements, contracts for sale and purchase of goods and services, lease agreements among others. This occurs when fulfilment of terms and obligations under any agreement remain outstanding. Prior to change of ownership, the repayment of these liabilities may have become due at a particular time.

The question therefore arises as to the treatment of these existing liabilities. Change of ownership of a company may have an effect on who pays these liabilities. This article will attempt a discussion into how existing liabilities are handled in the event of a change of company ownership.

CONCEPT OF A COMPANY AND OWNERSHIP

The Companies Act 2019, Act 992 is the foremost regulatory framework for the incorporation and running of companies in Ghana. The law defines a company as a business entity duly formed in accordance with legal procedures. It is trite knowledge that a company, upon incorporation, assumes the status of a legal person with rights, privileges, powers and obligations under the law.

A company has a separate legal entity, distinct from the founder, shareholders, or employees, and potential perpetual existence irrespective of what happens to these persons. The life of a company does not end with the death or withdrawal of the owners and members. A company has the ability to procure assets in its name and incur liabilities on its own. It is also clothed with the power to sue and be sued in its own name.

Ownership of a company is evidenced through shareholding, which entitles the member to voting rights, right to attend annual general meetings, receipt of dividend when declared, participation in capital distribution upon liquidation and winding up and many more. Shares represent interests of ownership and are acquired through registration or subscription or through transfer or sale. Shareholders or members in general meeting are those who own shares of the stock of a company. The owners could be natural or artificial persons.

Despite the fact of potential perpetual existence, company ownership may change at any point in time. The change may occur through various means of transfer of ownership interests such as gift to another individual or company, sale of shares, mergers and acquisitions or outright sale of the company.

THE QUESTION OF COMPANY LIABILITIES

A company has the capacity to engage in or undertake any business activity or enter into any transaction. During operations, a company may incur liabilities arising out of obligation to pay for purchase of goods and services, repay borrowed funds, remit taxes owed to government authorities, payment of warranty claims or guarantees provided by the company.

Liabilities of a company are different from personal liabilities of owners. Any financial obligation or amount owed to a third party or debt incurred from the acts of a company is a company liability. Examples are loans, accrued expenses, deferred tax liabilities, dividends payable, accounts payable etc. The law qualifies acts of the company as those acts which, when performed by a person in the company, have a legally binding effect on the company.

Generally, companies act through members in general meeting, the board of directors, and other officers or agents appointed by or under authority derived from the members in general meeting, or the board of directors while carrying on in the usual way of business. Subsequently, the company becomes criminally and civilly liable for such acts. Company liabilities may also cover liabilities in tort, negligence, statutory liabilities, commercial liabilities.

A creditor of a company is a person who is owed money or debt by the company. Examples of creditors include banks and financial institutions, individuals such as landlords, suppliers, and vendors among others. Creditors have the right to be paid and debts, when due, become payable as liabilities which may be payable upon the occurrence of contingent events. The company and the creditor often have an agreement on terms of repayment of the debt owed to the creditor.

Firstly, the Creditors usually seek repayment through the process outlined in the loan agreement. However, where the company fails to fulfil repayment terms, creditors have the right to take legal action against the company over the unpaid debt and the court may order the debtor to pay or make other decisions.

Although creditors may be protected under contractual obligations, in the event of change of ownership, the question of who bears liability arises in instances where there are liabilities to external parties, or where there are debts owed to creditors that remain outstanding and are due for settlement.

THE EFFECT OF CHANGE OF OWNERSHIP ON EXISTING LIABILITIES

Generally, existing liabilities are not affected by change in ownership and continue to remain with the company. However, during the process of change, the parties may contract on how to treat existing liabilities with due regard to the new organization of the company. Prior to this, due diligence may be conducted to inform the transferee of the company’s existing liabilities. The agreement may cover negotiation and renegotiation of terms of payment to creditors, restructuring or retention of some liabilities by the existing owner and indemnification of the new owner from undisclosed or contingent liabilities. The agreement also takes into consideration the obligation to comply with applicable laws and regulations.

Before the end of the transition process, if the previous owner fails to pay off debts owed by the company, a limitation may be placed on who becomes liable for existing debts that are due and payable. The parties agree on whether the new owner assumes accountability for them. In certain instances, the new owner agrees to take responsibility for the company’s assets and liabilities.

This places a legal obligation on the new owner to pay off existing liabilities. Alternatively, the parties may, as part of the agreement, decide that existing liabilities should be transferred to, and be paid by the previous owner of the company.

In any case, parties must conduct due diligence and seek legal advice to fully understand the implications of the agreement. In addition, it is essential to notify creditors of the change in ownership and to provide detailed information on how existing liabilities are to be handled. Creditors whose interests are compromised have the legal right to undertake any lawful action to enforce payment of debts owed to them by companies.

CONCLUSION

A company is classified as a legal entity responsible for debts incurred by it. It is therefore expedient for a company to carefully plan and manage its finances to honour debt obligations to external parties. The law, through various mechanisms, ensures that the interests of creditors are protected. Creditors, in turn, are entitled to seek redress in court upon breach of their rights. Despite being protected under the law; it is vital for companies undergoing a change of ownership to pay keen attention to the treatment of existing liabilities for smooth transition. Existing contracts and agreements must be reviewed to determine those to be renegotiated with the new owner. Comprehensively, how existing liabilities ought to be treated depends on the terms agreed by the parties to the contract of change. Regardless of the outcome, creditors must be informed of any changes that are likely to affect their rights and interests.