Transfer of undertaking

In the event of a transfer of undertaking, the rights and obligations of employees are transferred to the new employer. Staff automatically become employees of the new company, retaining their existing terms and conditions of employment. When does a transfer of undertaking occur in legal terms? What are the rights and obligations of the employer? And can directors still be held liable after the transfer of the undertaking?

When is there a transfer of undertaking?

A transfer of undertaking involves the transfer of the undertaking by a legal entity to another legal entity or natural person. This form of business transfer concerns the transfer of an economic entity. In the case of a share transaction, therefore, there is no transfer of undertaking. The undertaking does not need to have a specific legal form, nor does it need to be transferred in its entirety. The applicable laws and regulations also apply to the transfer of a business unit or business location.

Sale, merger, division of business activities

A business transfer or business takeover can take place in many ways. In the event of a sale, merger or division of (all or part of) the business activities to another company, including the business premises, inventory, company name and existing customers, there is a transfer of undertaking. In many cases, the Transfer of Undertakings Act applies in these situations. By law, employees of the company being taken over automatically transfer to the new company, retaining their rights and obligations.

Transfer of Undertakings Act

The main purpose of the Transfer of Undertakings Act is to protect the position of existing employees in the event of a takeover, merger or demerger. However, there is an important condition that applies. The transfer of undertakings must involve the transfer of a business unit or activity that is part of the company’s long-term economic activity.

Tangible assets and intangible assets

The decisive factor in determining whether a takeover or merger constitutes a transfer of undertaking is whether the identity of the transferred undertaking is retained. Whether the identity is retained is assessed on the basis of various circumstances, regulations and current legislation. In the case of a transfer of undertaking, the following factors are taken into account, among others:

The nature of the undertaking concerned
Whether tangible assets are being acquired
The value of the intangible assets at the time of transfer
Whether the staff are part of the transfer
Whether the customer base is part of the transfer
Whether the activities carried out after the transfer are comparable
The duration of any interruption of business activities

Consequences of a transfer of undertaking for staff

The consequences of a transfer of undertaking for the staff can be significant. For example, certain employees may become redundant in the event of a merger or takeover. In such situations, the new employer or the legal entity taking over the undertaking often seeks to have the employee in question leave the company. Employees are well protected, especially if they have a permanent employment contract. The employer can only dismiss redundant or superfluous staff by terminating the employment contract via the UWV or by dissolving the employment contract via the subdistrict court.

Transfer of undertaking: employee rights

What rights and obligations remain in place for employees in the event of a transfer of undertaking?

In the event of a transfer of undertaking, the rights and obligations of the employees of the acquired company automatically transfer to the new employer. This concerns the rights and obligations of the employee as set out in the employment contract at the time of the transfer. Employment conditions also remain in force in the event of a transfer of undertaking, as do agreements on additional holiday days, overtime pay, travel allowances, profit sharing and bonuses. The employee remains in the service of the “new” company. In addition, the former employer remains jointly responsible for compliance with the employment contract for a period of one year.

Director’s liability in the event of a transfer of undertaking

The director’s liability arises when the seller transfers his undertaking to a buyer and this subsequently results in the company no longer being able to meet its existing obligations. This is the case if the director has allowed the company to fail to meet its legal or contractual obligations that arose before the date of the transfer of the business and the claims of these creditors prove to be unenforceable. The same applies to a situation where the claim was still disputed at the time of sale and later proved to be enforceable.

The director and sole shareholder who sells his private limited company must carefully consider the buyer’s intentions with regard to the company to be transferred. Previous rulings show that the former director of a sold company may still be liable under certain circumstances. This means that even after the transfer of shares in his company, director’s liability may still apply.

Transfer of undertaking: unlawful conduct

In order to establish liability, it must be proven that the former director can be sufficiently seriously blamed for the non-recoverability of the claims. In this case, it is essential to establish whether the director knew or at least should have known that after the transfer of the business, it would no longer be possible to recover existing claims. According to the court, this is always the case if the transfer was intended to make it impossible to recover existing claims. However, even if the seller has not made sufficient efforts to investigate the buyer’s intentions with regard to the company, there may still be sufficient grounds for blame. This also applies if the seller has accepted the risk that the company will no longer be able to meet its obligations after the transfer of the business.

What can an entrepreneur do to avoid liability in the event of a transfer of business?

As an entrepreneur, you can prevent liability in the event of a business transfer primarily by carefully researching the buyer, their intentions and background in advance. For example, check whether the buyer is financially sound and has no history of bankruptcy. In addition, ensure that agreements are clearly and fully recorded in the acquisition and transfer documentation, including guarantees and indemnities. Bear in mind that, as the seller, you may still be liable for obligations towards the staff for up to one year after the transfer. Involve a solicitor in good time to prevent an apparently successful sale from leading to personal liability or protracted disputes.

Investigation of the buyer prior to the transfer of the business

According to the court, the seller must, prior to the transfer of the business, at least investigate the past, intentions and background of the buyer in question.

An important factor in the situation in question was that the buyer had been involved in a series of bankruptcies in the past. This fact, combined with the failure to investigate the buyer’s plans for the company in more detail, led to the former director being held personally liable.

Expert advice on directors’ liability

Once it has been established that the director has not, or at least not sufficiently, investigated the buyer and his intentions and has not acted in good faith, liability for unlawful acts may arise on the basis of the present ruling. The solicitors at Fruytier Lawyers in Business have extensive experience in the field of directors’ liability. Are you looking for a solicitor who can assist you in all areas? Our employment law solicitors will be happy to assist you in ensuring a smooth transfer of the business or in the event of imminent liability afterwards.