Warranty of Liabilities (“Garantie de Passif”) in French SARL Share Transfers

October 26, 2025

Index

1. The Purpose and Nature of the Warranty of Liabilities

When the shares of a French Société à responsabilité limitée (SARL) are transferred, the purchaser may later discover that the company’s financial situation is not as presented at the time of sale. Legal remedies for such discrepancies are limited under French law. To manage this risk, parties include a contractual warranty of liabilities (garantie de passif), a mechanism by which the seller undertakes to indemnify the buyer or the company for certain losses or obligations arising from circumstances predating the transfer.

The warranty serves to protect the purchaser against hidden or unrecorded liabilities, such as unprovisioned debts, tax adjustments, litigation, or social charges. It complements but does not replace statutory warranties relating to ownership and eviction.

2. Structure of the Clause

The warranty of liabilities is usually a standalone schedule or annex to the transfer deed.
Its structure follows a consistent pattern:

Declarations by the seller confirming the accuracy of the company’s accounts, its legal and tax compliance, the absence of undisclosed litigation, and the reliability of the information provided.
Operative clause specifying the seller’s undertaking to bear certain liabilities or indemnify the purchaser or the company if previously unknown obligations are later revealed.
Implementation provisions setting out thresholds, notification requirements, valuation rules, and limits of liability.

These declarations are not mere formalities: once signed, they have contractual value and can trigger indemnification if proven inaccurate.

The seller’s commitment to “bear any liability revealed after the transfer” constitutes a liability warranty, not a guarantee of net asset value.
The distinction is critical: the warranty covers the consequences of an increase in liabilities or a reduction in assets, but it does not ensure the future profitability of the company.

3. Two Principal Models of the Warranty

3.1 Indemnity or “Pure Liability Warranty”

In this form, the seller undertakes to indemnify the company or the purchaser for losses caused by the discovery of a pre-transfer liability.
The clause may, for instance, provide that the seller will reimburse the company the amount of any unrecorded tax reassessment or unpaid social charges, or directly pay affected creditors.

The amount payable corresponds to the net impoverishment resulting from the newly discovered debt.
Where the company is designated as beneficiary, the warranty is a stipulation for a third party, allowing the company to claim directly against the seller.

This warranty often includes:

A franchise or threshold, below which claims cannot be made;
A cap on total indemnities, often linked to the transfer price;
An obligation for the buyer to inform the seller promptly of any event likely to trigger the warranty.

Although indemnities can, in theory, exceed the transfer price, most deeds introduce negotiated limits to preserve proportionality.

3.2 Price Adjustment or “Value Warranty”

In the second model, the seller agrees to reduce the sale price if post-transfer events reveal a reduction in net asset value resulting from pre-existing liabilities.
This mechanism is particularly suitable when the price is paid in instalments, allowing the adjustment to be applied to the balance due.

Because this form directly affects the determination of price, the refund amount cannot exceed the price originally paid. The buyer’s right is then contractual, not proprietary, and operates as a reduction of consideration, not an indemnity.

Both forms can coexist, with one applying to tax or social risks and the other to general liabilities.

4. Beneficiaries and Standing to Claim

Determining the beneficiary of the warranty is essential.
Typically, the beneficiary is the purchaser, who alone may claim payment.
However, the parties may stipulate that the company itself benefits directly, in which case the clause must clearly designate it as such.

Where a merger or restructuring later occurs, the successor company may inherit the warranty rights if the clause so provides.
If no express stipulation exists, only the original beneficiary may act.
Subsequent purchasers of the shares do not automatically benefit unless the warranty is expressly assignable.

In practice, precise drafting avoids uncertainty about who holds the claim and under what conditions.

5. Typical Clauses Found in Practice

5.1 Net Asset Adjustment Clauses

Some deeds include a clause called “price revision – net asset warranty.”
It provides that an agreed set of accounts will be established as of the transfer date, and that any negative difference between the net asset value determined in those accounts and the reference value used to fix the price will reduce the price proportionally.
This clause functions as a price adjustment, not as an indemnity for liabilities, and cannot exceed the transfer price.

5.2 Comprehensive Liability Coverage

Another frequent clause guarantees the buyer against any increase in liabilities or reduction in assets, particularly for fiscal or social debts arising before the transfer but revealed afterward.
Such a clause applies even if the buyer was aware of certain ongoing proceedings, unless the clause expressly excludes known risks.

5.3 Unprovisioned Litigation

If the seller failed to make a provision for a known dispute contrary to the representations given, the buyer may claim indemnification for the resulting costs or judgments, regardless of prior awareness of the litigation.

5.4 Timing of the Liability

The warranty applies to liabilities that exist at the time of transfer, or that have their origin or cause before that date, even if they are discovered later.
The valuation date and accounting reference point must therefore be clearly defined to avoid disputes.

5.5 Loss or Damage Requirement

Depending on drafting, some warranties apply automatically upon discovery of a liability, even before the buyer has suffered an actual loss, while others require proof of prejudice.
Clauses that indemnify for “any loss or damage suffered” are interpreted restrictively; a mere accounting discrepancy without real loss will not suffice unless expressly covered.

5.6 Accounting Errors and Professional Negligence

The seller cannot recover from an accountant whose errors caused the warranty to be triggered. Once the seller received a price calculated on incorrect data, restitution to the buyer is final, regardless of the accountant’s mistake.

5.7 Management Faults and Causation

Past management errors are not automatically covered by the warranty unless they cause a measurable increase in liabilities or decrease in assets.
Mere misconduct without financial consequence does not trigger compensation.

6. Notification and Implementation

A well-drafted warranty must detail the procedure for notification and the conditions for enforcement.

The buyer should notify the seller within a defined period upon learning of any claim or event likely to activate the warranty.
If the clause is silent on consequences of late notice, courts may still deny indemnity where delay prevents the seller from defending or mitigating the loss.
Best practice is to stipulate that failure to notify within the time limit does not bar the claim unless it causes proven prejudice to the seller.

The warranty should also regulate:

The method of calculation of losses;
The currency and payment timing;
The applicable limitation periods (commonly 2 to 5 years);
The method for handling tax audits or disputes involving both parties;
The governing law and jurisdiction, or a mediation/arbitration mechanism.

7. Assignability and Subsequent Transfers

If the shares covered by the warranty are resold, the initial warranty does not automatically extend to the new buyer.
Only if the original deed expressly authorises assignment or states that the warranty benefits “successors and assigns” can a subsequent purchaser rely on it.
Otherwise, the original purchaser remains the sole party entitled to enforce it.

In certain cases, the initial buyer may transfer its rights under the warranty to the next buyer by separate agreement, provided the contract is not deemed intuitu personae (personal in nature).

8. Scope Limitations and Exclusions

Warranties may exclude specific categories of risk, such as:

matters disclosed in due diligence reports;
liabilities already provisioned in the accounts;
risks for which insurance cover exists;
changes in law or accounting standards occurring after closing;
losses resulting from the purchaser’s own decisions or management after acquisition.

Such exclusions must be clear and specific. General disclaimers are interpreted narrowly.

9. Interaction with Accounting Policies

When the buyer has approved the accounting methods used for the reference financial statements, they cannot later invoke the warranty to contest those same methods.
The warranty covers unknown discrepancies, not policy differences knowingly accepted at closing.
This reinforces the need for a thorough review and express approval of accounting principles during the negotiation phase.

10. Enforcement and Judicial Interpretation

Courts interpret warranties of liabilities strictly. The claimant must establish:

The existence of a pre-transfer cause of the liability;
The link between that cause and the loss; and
The compliance with procedural and contractual conditions (notice, time limit, cap).

Fraud, however, nullifies contractual limits: a seller who intentionally conceals information may be held liable beyond agreed caps or time limits.

Where an accounting irregularity or overstatement was gross and deliberate, courts have accepted indemnification beyond the contractual ceiling, considering the clause circumvented by fraud.

11. Drafting Recommendations

A robust warranty clause should include:

Scope of coverage: liabilities existing or having their origin before the transfer;
Valuation method: based on net asset change or specific categories of debt;
Thresholds and caps: de minimis, basket, and overall limit;
Notice provisions: time frame, format, and consequences of delay;
Duration: aligned with tax and social audit periods;
Information and cooperation duties: for handling third-party claims;
Beneficiaries: clear identification of the entity entitled to payment;
Assignment clause: to preserve or restrict transferability;
Fraud carve-out: ensuring limits do not protect fraudulent conduct.

Precision in wording prevents later disputes about scope and timing.

12. Practical Example of a Warranty Clause (Illustrative)