Third-Party Liability Arising from a Corporate Spin-off

Legal insight

May 2025 

Areti Kolokotroni, LL.M.

Summary: The spin-off of a business division — a frequent phenomenon in modern corporate practice, especially due to its tax advantages — constitutes a form of corporate transformation and, more specifically, one of the three legally recognized forms of demerger (full demerger, partial demerger, and division spin-off). This article focuses on the liability towards creditors and third parties borne by both the company effecting the spin-off by transferring a division of its business activity (“demerging entity”), and the company receiving the division (“beneficiary entity”).

1. Introduction – Basic Features of the Division Spin-off

The division spin-off, as a specific form of demerger, was first explicitly introduced by Law 4601/2019. Until then, it functioned as an atypical, jurisprudentially constructed transformation. Its key features are the following:

- The entirety of the assets and liabilities of the demerging company is not transferred, but only those relating specifically to the business division. A “division” is understood to be all elements (assets and liabilities) which, from an organizational standpoint, constitute an autonomous operation, i.e., a unit capable of operating independently (e.g., real estate management division, infrastructure, software development, etc.). The division must be subject to distinct accounting tracking, or at least the company must be able to isolate its revenues to substantiate its autonomy.

-The demerging company continues to exist as a legal entity and operates in relation to its remaining divisions, unlike a full demerger, where the company's entire activity is transferred and the legal entity is dissolved. This necessarily presupposes that the demerging entity maintains more than one business division after the spin-off.

-The net asset value of the transferred division (determined after a valuation of assets and liabilities) is contributed in kind to increase the share capital of the beneficiary company by the corresponding amount. In exchange, the demerging company receives shares or equity interests in the beneficiary and becomes a shareholder or partner, as stipulated in the demerger agreement. This is the main difference from the partial demerger, where the division is similarly transferred and the demerging entity continues to exist, but the shareholders of the demerging company — not the company itself — participate in the beneficiary’s capital post-deal.

-The spin-off may be effected either through the absorption of the division by one or more existing companies, or by incorporating one or more new companies to receive the division, or a combination thereof.

-The beneficiary automatically and universally succeeds, by express statutory provision (Art. 70, Law 4601/2019), to all rights and obligations related to the acquired business division. This universal succession also applies to ongoing contracts and legal relationships (e.g., employment contracts of employees attached to the transferred division). Accordingly, pending litigation involving the division continues without interruption under the name of the beneficiary.

2. Joint and Several Liability of Demerging and Beneficiary Companies Towards Creditors

It is a misconception that the demerging entity is automatically released from liabilities and debts related to the transferred division, shifting all burdens to the new entity. Creditors of the demerging company may now face a new legal person — possibly less solvent — than the one with which they originally contracted. For this reason, the legislator has instituted, under certain conditions, joint and several liability of the demerging and beneficiary entities for obligations relating to the transferred division.

According to Art. 65(4) of Law 4601/2019, where a creditor’s claim (which originated before the completion of the spin-off and was contractually assumed by the beneficiary) is not satisfied — especially due to failed enforcement or bankruptcy of the beneficiary — then both entities are jointly and severally liable for that claim. Although the beneficiary has primary liability, the demerging company is secondarily (subsidiarily) liable, similar to that of a guarantor. Naturally, for post-spin-off obligations, only the beneficiary is liable.

The conditions for joint and several liability are:

a) The creditor’s claim predates the spin-off and is included in the obligations of the transferred division;

b) The creditor has first sought satisfaction from the beneficiary;

c) The beneficiary’s failure to satisfy the claim is due to unsuccessful enforcement or bankruptcy.

If all three conditions are met, the creditor may then seek payment from the demerging company. It is noted that claims against the demerging entity are time-barred five (5) years after the spin-off, after which only the beneficiary may be pursued.

3. Defenses Available to the Demerging Company

a) Beneficium ordinis (right of discussion): If the above conditions are not cumulatively met, the demerging entity may invoke the defense of “discussion” by analogy to Art. 855 of the Greek Civil Code (GCC), i.e., refusal to pay until the creditor has attempted enforcement against the beneficiary and failed. In such cases, the claim is dismissed temporarily but may be revived if enforcement against the beneficiary proves fruitless. An exception applies where the beneficiary’s insolvency is obvious (e.g., no assets or prior failed enforcement), allowing the creditor to proceed directly against the demerging entity.

b) Release from liability (Art. 862 GCC by analogy): The demerging entity may also claim release if the creditor’s failure to collect is due to their own fault (e.g., long inaction leading to dissipation of the beneficiary’s assets).

4. Right of Recourse Within the Context of Joint and Several Liability

Given that the beneficiary is primarily liable, it is generally held that if it satisfies the debt, it has no right of recourse against the demerging company. The converse, however, does apply: the demerging company that pays under the joint and several liability regime may seek recourse against the beneficiary. The demerger agreement may contain specific provisions on the allocation of responsibility; otherwise, Art. 487(1) GCC applies, prescribing equal apportionment of liability.

5. Creditors’ Right to Demand Security

Law 4601/2019 allows creditors to demand appropriate guarantees (e.g., surety, mortgage, pledge) within 30 days of publication of the demerger plan in the General Commercial Registry (G.E.MI.) — prior to the decision-making assembly — if they can sufficiently prove that the financial structure of the involved companies due to the demerger necessitates such security and if they have not already received such guarantees. This applies to creditors of both the demerging and beneficiary entities, whose claims predate the spin-off but were not yet due at that time. Creditors of the beneficiary may also face heightened risk due to potential deterioration in its financial position post-deal.

6. Creditor Protection Under General Civil Law Provisions

A debated issue is whether the specific protections under Law 4601/2019 exclude general remedies under civil law. The prevailing opinion holds that creditors may cumulatively rely on provisions such as Art. 479 GCC (transfer of enterprise) and Art. 939 GCC (fraudulent conveyance), provided their specific requirements are met — without needing to prove failure of satisfaction as required by Art. 65(4).

The issue becomes more pronounced with clawback actions under Art. 939 GCC, where creditors may annul transfers if the transferor's assets are insufficient (i.e., fraudulent impoverishment). If successful, the transfer is ineffective against creditors, rendering the transferred assets again liable. Practically, this resembles an annulment of the spin-off, even though legal grounds for annulment are strictly specified by law, and this scenario is not among them.

7. Concluding Remarks

As shown, the legislator, recognizing the risks posed to creditors — especially those of the demerging company where the debtor’s identity effectively changes — has provided for subsidiary liability of the demerging entity under specific conditions. Furthermore, the use of general civil law provisions is permitted to enhance creditor protection and secure their legitimate expectations.