Transfer of part of the plant and its legal pitfalls

1. What is a part of a business undertaking from a legal perspective?

• Economically and functionally independent – it cannot be just a random collection of assets or debts, but a coherent unit capable of independent operation.

• Designated as a branch by the entrepreneur's decision – it must be formally recognised as a separate part of the business.

• Recorded in the accounting and organisational structure – if there is no clear definition of its assets and liabilities, problems may arise with its transfer.

In practice, it is not enough to transfer, for example, only a certain set of contracts or receivables – the overall continuity of operations must be ensured.

Therefore, it should not be a purpose-built, diverse grouping of unrelated items created before the conclusion of the contract. In such a case, it would not be a purchase of a part of a business undertaking, but a purchase of individual items of the business under a general purchase agreement (concerning movable or immovable property), which is subject to a somewhat different legal regime under Czech legislation.

2. How to ensure the effectiveness of the transfer?

In its judgment 33 Cdo 2383/2023, the Supreme Court emphasised that if a part of a business undertaking is not properly specified and designated as a separate organisational unit, it cannot be transferred as a whole along with receivables and debts. For the transfer to be effective, it is necessary to:

• Clearly define the subject of the transfer in the contract (e.g., list specific assets, liabilities, employees, contracts, etc.).

• Ensure accounting and organisational continuity – the transferred part of the business undertaking must operate independently even after the change of ownership.

• Publish the transfer in the Collection of Deeds of the Commercial Register – under Section 2180 of the Czech Civil Code, it is necessary to publish the transfer of a part of a business undertaking in the Collection of Deeds, otherwise the ownership right to the part of the business undertaking will not be transferred.

Entrepreneurs should therefore have the transfer documentation carefully prepared by their Czech legal team to avoid the entire transaction being challenged. An inappropriate definition of the branch can lead to completely different legal consequences than the contracting parties originally intended.

3. Risks of an ineffective transfer

If the transfer is not carried out correctly, serious legal consequences may arise:

• Disputes regarding the nature of the contractual relationship – it will not be clear to the contracting partners what rights and obligations govern their contractual relationship.

• Ineffectiveness of the transfer towards third parties – the transfer of receivables and debts to the acquirer of the part of the business undertaking may not occur at all.

• Liability claims – the fact that one of the items of the "part of the business undertaking" is not transferred to the acquirer may, depending on the circumstances of the case, generate liability claims against the transferor in the form of liability for defects, damages, or the application of a contractual penalty.

In the aforementioned judgment, for example, it was addressed that receivables that were factually transferred might not have been effectively transferred to the acquirer from a legal standpoint, which created considerable legal uncertainty in the given contractual relationship.

4. Recommendations for entrepreneurs

To ensure a smooth transfer of a part of a business undertaking:

• Consult the transaction with legal experts – you will ensure the correct documentation.

• Precisely specify the transferred branch – you will prevent legal disputes.

• Ensure that the part of the business undertaking is truly independent – so that it is not just a random "grouping of contracts".

• Adhere to legal formalities – especially publication in the Collection of Deeds and notification to third parties.

The Supreme Court has clearly shown that inaccuracies in the definition of a part of a business undertaking can ultimately lead to the ineffectiveness of the transfer of its individual items.

If you are planning to transfer a part of a business undertaking (a branch), do not expose yourself to the risk of legal complications and have it professionally assessed.