When is a Successor Company Liable for the Debts of a Transferred Business in Japan if it Continues to Use the Seller's Trade Name?

Japanese Attorney at Law - Bengoshi L.L.

• 9 min read

When a business changes hands in Japan, a critical question for creditors of the original business is whether the new owner (the successor company) can be held responsible for the debts incurred by the previous owner (the seller or transferor). The general legal principle in most jurisdictions, including Japan, is that the sale of a business's assets does not automatically transfer its liabilities to the buyer unless the buyer explicitly agrees to assume them. However, Japanese law carves out a significant and somewhat unique exception to this rule when the successor company continues to use the seller's trade name. This doctrine of "successor liability through continued use of trade name" (商号続用の責任 - shōgō zokuyō no sekinin) is a vital concept for any party involved in or affected by business transfers in Japan.

The Statutory Basis for Successor Liability

The primary statutory provisions governing this form of successor liability are:

  • Article 22, Paragraph 1 of the Companies Act (会社法 - Kaishahō): This applies when the transferee (the acquiring entity) is a stock company (kabushiki kaisha) or other type of company under the Companies Act. It states: "If a company that has acquired a business (hereinafter in this Article referred to as the 'Transferee Company') continues to use the trade name of the company that transferred such business (hereinafter in this Article referred to as the 'Transferor Company'), the Transferee Company shall also be liable for the performance of any obligations that have arisen from the business of the Transferor Company."
  • Article 17, Paragraph 1 of the Commercial Code (商法 - Shōhō): This provides a similar rule when the transferee is an individual merchant.

These articles establish a default rule: if the buyer of a business continues to operate it under the seller's established trade name, the buyer also takes on the seller's business-related debts.

Rationale for the Successor Liability Rule

The underlying purpose of this rule is primarily the protection of creditors. Several rationales have been advanced:

  1. Appearance of Business Continuity and Creditor Reliance: When a business continues to operate under the same familiar trade name after an ownership change, existing and potential creditors may reasonably assume that the business entity remains essentially the same, or that the new owner has accepted responsibility for the old owner's obligations. They might continue to extend credit or transact with the business based on the goodwill and reputation associated with that name. The law aims to protect this reliance.
  2. Preventing Evasion of Liabilities: Without such a rule, a company could potentially transfer its valuable assets and goodwill (often symbolized by the trade name) to a new entity, leaving its debts behind with an empty shell, thereby defrauding creditors.
  3. Theoretical Basis (Ongoing Debate):
    • Apparent Authority / Estoppel (外観法理 - Gaikan Hōri): One view is that the continued use of the trade name creates an "appearance" (外観 - gaikan) that the transferee is the same responsible entity or has assumed the debts, and the law protects third parties who rely on this appearance. The transferee, by continuing the name, is estopped from denying liability.
    • Implied Assumption of Debt / Presumed Intent: Another perspective, noted in the PDF's commentary for Problem 59, suggests the rule might reflect a legislative presumption that, by continuing the trade name, the parties (or at least the transferee benefiting from the name's goodwill) ordinarily intend for existing business debts to be honored, or that public policy dictates such an assumption to ensure commercial fairness.

Regardless of the precise theoretical underpinning, the practical effect is to place a burden on the successor entity that chooses to trade on the predecessor's name.

Key Conditions for Triggering Liability under Article 22(1)

For a transferee company to be held liable under Article 22, Paragraph 1, several conditions must typically be met:

  1. A "Business Transfer" (事業譲渡 - Jigyō Jōto) or an Analogous Situation:
    The provision explicitly refers to a company that has "acquired a business." This typically means the transfer of an organized, operational business unit, which includes not just individual assets but often goodwill, customer lists, know-how, and ongoing operations.
  2. Continued Use of the Transferor's "Trade Name" (商号 - Shōgō) by the Transferee:
    This is the linchpin of the liability.
    • What Constitutes a "Trade Name" for this Purpose?
      • Formal Registered Trade Name: The officially registered corporate name of the transferor company is clearly within scope.
      • Extension by Analogy to Unregistered Business Names, Service Marks, or "House Names" (屋号 - Yagō): This is a critical area where Japanese courts have significantly broadened the application of the principle. The Supreme Court of Japan, in a landmark judgment on February 20, 2004 (Heisei 16), addressed a situation involving the transfer of a golf course business. The transferee continued to use the distinctive name of the golf club (the "club name"), which, although not the transferor's formal registered corporate name, was widely recognized by members and the public as identifying that specific golf business and its operator. The Supreme Court held that if such a non-registered business name (like a well-known store name, restaurant name, or, as in that case, a club name) functions in a manner equivalent to a trade name in identifying the business entity to third parties and creating an appearance of continuity, its continued use by the transferee can trigger a liability analogous to that under Article 22(1) (which was then Article 26(1) of the old Commercial Code).
      • This means that using a prominent brand name or service name associated with the acquired business can be just as risky as using the formal corporate name.
      • The scenario in the PDF's Problem 59 involves A社 operating "B Golf Club" (Bゴルフ倶楽部). When Y社 takes over this business and continues to use the name "B Golf Club," this Supreme Court precedent becomes highly relevant. Even if Y社 has a different formal corporate name, the continued use of the well-known "B Golf Club" name can create the necessary appearance of continuity.
  3. The Debt Must Have "Arisen from the Business of the Transferor Company" (譲渡会社の事業によって生じた債務 - Jōto-gaisha no jigyō ni yotte shōjita saimu):
    The successor's liability is not for all of the transferor's debts, but only for those obligations that were incurred in connection with the specific business operations that were transferred. Debts from unrelated business activities of the transferor are not covered.
    • In Problem 59, the shareholder X's deposit was made to A社 specifically for membership in the "B Golf Club." This debt clearly arose from A社's (the transferor's) golf club business that was subsequently taken over by Y社.

Extension of Successor Liability Principles to Company Demergers (会社分割)

While Article 22 of the Companies Act explicitly refers to "a company that has acquired a business" (事業を譲り受けた会社 - jigyō o yuzuriuketa kaisha), suggesting a traditional business transfer (asset sale) context, Japanese courts have extended its principles by analogy to company demergers (会社分割 - kaisha bunkatsu). A company demerger is a statutory form of corporate reorganization where a company carves out a part of its business and transfers it to another existing company or a newly established company.

The Supreme Court of Japan, in another key judgment on June 10, 2008 (Heisei 20)—which is directly pertinent to the facts of Problem 59, as that case involves a company demerger—held that the rationale for protecting creditors who rely on the continuity of a business identifier (like a trade name or a functional equivalent) applies with equal force in the context of a company demerger.

Therefore, if a company is newly established through a demerger (an "incorporation-type company demerger" - 新設分割 shinsetsu bunkatsu) or if an existing company absorbs a business segment through a demerger (an "absorption-type company demerger" - 吸収分割 kyūshū bunkatsu), and that successor company continues to use the trade name (or an equivalent business identifier) of the demerged business, it can be held liable for the pre-existing debts of that specific business segment, even if those debts were not formally allocated to it under the terms of the demerger plan.

The Supreme Court's reasoning in the 2008 case emphasized that, from the perspective of creditors (such as golf club members with deposit claims), the continued use of the familiar club name by the new operating company creates an appearance of business continuity that warrants legal protection. The Court noted that such creditors cannot generally be expected to meticulously examine complex demerger plan documents filed at the company's head office to ascertain precisely which liabilities have been transferred and which have been left behind with the (potentially less solvent) demerging company.

Application to Problem 59:
In Problem 59, Y社 was established through a company demerger from A社, taking over the "B Golf Club" business and continuing to use that well-known name. The demerger plan, however, stipulated that A社's pre-existing deposit refund obligations to club members (like X) were not transferred to Y社. Despite this formal non-assumption in the demerger plan, Y社's continued use of the "B Golf Club" name would, under the Supreme Court's 2008 ruling, likely subject Y社 to liability for X's deposit refund claim, through an analogous application of Article 22, Paragraph 1.

Disclaiming Successor Liability (Article 22, Paragraph 2)

The transferee company is not without recourse to avoid this statutory successor liability. Article 22, Paragraph 2 of the Companies Act provides two methods for disclaimer:

  1. Registration of Disclaimer: The Transferee Company can avoid liability if, without delay (遅滞なく - chitai naku) after acquiring the business, it registers in the commercial register the fact that it will not be liable for the performance of any obligations of the Transferor Company. This public registration serves as constructive notice to all third parties.
  2. Notice to Specific Third Parties: Alternatively, if, without delay after the transfer, both the Transferee Company and the Transferor Company give specific notice to a particular third-party creditor that the Transferee Company will not be liable for the Transferor Company's obligations, then the Transferee Company is not liable to that specific creditor who received such notice.

Effectiveness of the Disclaimer:
The disclaimer must be clear, unambiguous, and timely.

  • Timing ("Without Delay"): This is a factual determination, but it implies prompt action soon after the business transfer becomes effective.
  • Clarity of Notice: If the notice method is used, the communication must unequivocally state that the transferee is not assuming the transferor's debts. Ambiguous or misleading communications may not suffice.
  • Application to Problem 59: After the demerger, A社 (transferor) and Y社 (transferee) sent a letter titled "Request" (お願い書 - onegaisho) to club members, including X. This letter informed them that Y社 was now operating the "B Golf Club" and requested them to convert their existing memberships (which included deposit rights against A社) into shares of Y社. The crucial question is whether this "Request" letter constituted an effective notice of non-assumption of A社's deposit liabilities by Y社. The Supreme Court in the June 10, 2008 case, dealing with a very similar letter, found that such a communication, which focused on a proposal for future membership conversion rather than clearly disclaiming past liabilities, did not satisfy the requirements for a valid disclaimer. If the "お願い書" in Problem 59 similarly lacked a plain statement that Y社 would not be responsible for A社's existing deposit refund obligations, it would likely be deemed ineffective as a disclaimer under Article 22(2) principles.

Brief Comparison with U.S. Successor Liability Doctrines

U.S. law on successor liability for corporate debts following an asset purchase is generally more restrictive than Japan's Article 22 approach when it comes to mere continuation of a trade name. The traditional U.S. rule is that an asset purchaser does not assume the seller's liabilities unless one of four exceptions applies:

  1. The purchaser expressly or impliedly agrees to assume liabilities.
  2. The transaction amounts to a de facto merger or consolidation of the two companies.
  3. The purchasing company is a "mere continuation" of the selling company (this usually requires continuity of ownership, management, and business operations, not just the name).
  4. The transaction was entered into fraudulently to allow the seller to escape liability.

While some U.S. states have developed additional exceptions in specific contexts (e.g., the "product line" exception for tort liabilities related to defective products, or broader theories for environmental liabilities), the simple act of continuing to use the seller's trade name is generally less likely, on its own, to trigger broad successor liability for all pre-existing business debts compared to the fairly direct statutory consequence under Japanese law.

Conclusion

Under Japanese law, a company that acquires a business and continues to use the transferor's trade name—or a functionally equivalent business identifier like a well-known store or club name—generally also becomes liable for the pre-existing debts of that specific business. This principle, enshrined in Article 22 of the Companies Act and its Commercial Code counterpart, has been robustly applied by Japanese courts, including its extension by analogy to company demergers, primarily to protect the reasonable expectations of creditors who rely on the continuity of the business identity.

While successor companies can take specific steps to disclaim this liability, such as by promptly registering a disclaimer or providing clear notice to creditors, failure to do so effectively can result in the successor being held responsible for obligations it did not formally assume in the transfer agreement or demerger plan. This highlights the critical importance of careful due diligence regarding existing liabilities and clear, unambiguous communication concerning their assumption or non-assumption in any business acquisition or reorganization in Japan where an established business name with associated goodwill is being continued by the new operator.