Assumption of certain liabilities: Overview, definition, and example
What is the assumption of certain liabilities?
The assumption of certain liabilities refers to an agreement in which one party agrees to take on the responsibility for certain existing debts, obligations, or liabilities of another party. This typically occurs in the context of business transactions, such as mergers, acquisitions, or the sale of assets. The party assuming the liabilities takes on the financial and legal responsibility for those obligations as part of the deal, which might include things like outstanding debts, lawsuits, leases, or employee-related obligations.
This assumption can be a negotiated part of a transaction and is often carefully outlined in a legal agreement. It helps ensure that both parties clearly understand the scope of the liabilities that are being transferred, and it helps manage risks associated with taking on those obligations.
Why is the assumption of certain liabilities important?
The assumption of certain liabilities is important because it defines the financial responsibilities of the parties involved in a transaction. For businesses, assuming liabilities can help transfer risks from one party to another, but it can also introduce new risks and financial obligations. For SMB owners, understanding which liabilities are assumed during a business transaction is crucial for accurately assessing the financial impact of the deal.
For buyers, assuming liabilities may be necessary to acquire the assets or operations of a business, but it’s critical to understand which liabilities are being assumed to avoid unexpected financial burdens. For sellers, limiting the liabilities they retain after a transaction can protect them from future claims related to past actions.
Understanding assumption of certain liabilities through an example
Imagine you own a small software company and decide to sell your business to a larger corporation. As part of the sale, the corporation agrees to assume certain liabilities, such as the remaining lease obligations for office space and outstanding employee severance payments. However, you retain responsibility for a lawsuit related to a previous contract dispute.
In this case, the larger corporation takes on the responsibility for the liabilities it assumes as part of the purchase, such as continuing lease payments, while you retain the liability for the lawsuit. This is negotiated and clearly outlined in the purchase agreement to avoid confusion after the transaction is complete.
In another example, a company is acquiring a competitor and agrees to assume the competitor’s liabilities related to outstanding vendor payments and employee pension contributions. In exchange for assuming these liabilities, the acquiring company receives the competitor’s assets, including intellectual property and customer contracts.
Example of an assumption of certain liabilities clause
Here’s an example of what an assumption of certain liabilities clause might look like in a contract:
“The Buyer agrees to assume the following liabilities of the Seller, effective as of the closing date: (i) all outstanding debts owed to the Seller’s creditors as listed in Exhibit A; (ii) the obligations under the Seller’s lease agreements for the property located at [address]; and (iii) employee severance obligations. The Buyer shall not assume any other liabilities, including but not limited to claims, lawsuits, or taxes incurred prior to the closing date. The Seller shall remain liable for any liabilities not expressly assumed by the Buyer in this Agreement.”
Conclusion
The assumption of certain liabilities is a key aspect of many business transactions, particularly mergers, acquisitions, or asset sales. It helps clarify the responsibilities of each party and ensures that the transfer of obligations is done transparently. For SMB owners, carefully managing and negotiating the assumption of liabilities can mitigate potential risks and protect the business from unexpected financial obligations. By clearly outlining which liabilities are being assumed, businesses can ensure that they are fully aware of their financial responsibilities and avoid surprises in the future.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.