The deal is closed, the bills are only beginning
Kirill spent twelve years building a logistics company and in early 2025 decided to acquire his own manufacturing. A polymer packaging plant in the Kaluga region came along: 100% of the LLC was held by its two founders, Viktor with 70% and Elena with 30%. They agreed on RUB 240 million. The story is a composite, with invented names and figures, but contracts like this reach us regularly, usually with claims already attached.
Due diligence took five weeks, and a data room of more than nine hundred files revealed nothing alarming. In February the contract was signed before a notary, as required for a stake in an LLC. Kirill considered the warranties section the best part of the document: the sellers confirmed that the company had no liabilities beyond those shown in the balance sheet as at 31 December 2024 and in the schedule, that taxes had been paid correctly and that there were no disputes. Liability was capped at 25% of the price, that is, RUB 60 million. The sellers refused an escrow, and Kirill gave way so as not to lose a month.
In May the pellet supplier sent a claim letter for RUB 17 million for deliveries made in 2023. The debt was nowhere in the accounts, but a reconciliation statement turned up bearing the signature of Viktor, who was then still the director.
And in September the tax inspectorate ordered a field tax audit covering 2022-2024.
How representations and warranties work and who is liable for them
The provision is short. Under Article 431.2 of the Russian Civil Code, a party that gave its counterparty inaccurate representations about circumstances material to the contract must compensate the losses or pay a contractual penalty, if one was agreed. Almost anything can be warranted, even the financial position of a third party. When a business is sold, that third party is the company itself.
The most valuable part for the buyer is tucked away in paragraph 4 of the article. If the representations were given in connection with a contract for the disposal of stakes or shares, the seller is liable regardless of whether he knew he was saying something untrue. There is no need to prove intent: a mismatch with reality is enough.
Elena, incidentally, replied first of all that she had never been an entrepreneur and was hearing about the supplier for the first time. For a share deal that is no argument: the rule also applies to a seller who is a private individual. It can be disapplied only by an express term of the contract, and Kirill’s contract had none.
It works the other way too. In Resolution No. 49 of 2018, the Plenum of the Supreme Court clarified that the fact and content of a representation cannot be proved by witness testimony. However passionately Viktor insisted over dinner that the plant was clean, the court needs a signed text.
The tax authority came for the years before the deal
In February 2026 the audit ended with a report: RUB 31 million in tax, around RUB 9 million in late-payment interest, and a fine. The complaint was familiar to the point of tedium: a “technical” (sham) supplier of raw materials. Viktor replied that the audit had been ordered under the new owner and that he did not admit any violations.
The Supreme Court considered an almost identical dispute in March 2023 (Ruling No. 305-ES22-17862). The sellers of stakes in a forex dealer assured the buyer that the company would face no claims for the period before the deal, including from state authorities. Soon afterwards the Bank of Russia revoked its licence for past violations, and three courts ruled against the buyer, reasoning that only accomplished facts can be warranted. The Supreme Court’s Economic Disputes Chamber took a different view. A representation may concern the causes of something that comes to light later, and a seller who warranted that there were no violations is, as a general rule, liable when regulators uncover them. Ignorance and absence of fault are no excuse here.
The same ruling contains a conclusion that Kirill liked at first and then did not. The buyer is not obliged to fight the tax authority at its own expense or the company’s unless the contract requires it. But if the buyer did not inform the seller of the claims and did not involve the seller in the process, the seller’s liability may be reduced if the seller proves that the claims could have been fought off, at least in part. The conclusion is drawn by analogy with Article 462 of the Civil Code.
There is a catch here. Kirill’s team wrote to the sellers only after the audit report and prepared the objections on its own. Now Viktor says the supplier could have been defended, and he is spreading the delivery documents out on the table.
And what if the buyer knew?
The sellers’ second argument proved more awkward. A letter from the supplier mentioning the reconciliation was sitting in the data room, in a folder called “Correspondence 2023”. So, Viktor says, the buyer knew about the debt and bought with his eyes open.
The argument is not an empty one. In July 2024 the Supreme Court overturned judgments in favour of a stake buyer who had sought a RUB 203.9 million price reduction because of a debt not reflected in the financial statements (Ruling No. 305-ES24-4207). Before the deal the buyer had himself owned half of the company, and the statements had been approved by both participants. The Chamber reiterated that a party who knows a representation to be false cannot claim anything, and that an equal participant is presumed to be aware of the company’s affairs. Otherwise, the court observed, representations could be used to shift all of the company’s losses onto one partner. If a stake is being bought out from a co-owner against the backdrop of a corporate conflict, the seller will almost certainly rely on exactly this.
Kirill, however, was never a partner, and that changes the picture. In May 2025 the Commercial (Arbitrazh) Court of the Moscow District held that access to information during pre-deal due diligence cannot be equated with a participant’s knowledge. A single letter among nine hundred files, one that does not even state the amount, hardly amounts to “knew full well”. Even so, the point will still have to be argued.
There is another detail in Kirill’s favour. If the seller himself knew the representation was false, he cannot rely on the buyer’s lack of diligence: paragraph 35 of Plenum Resolution No. 49 says so expressly. The reconciliation statement bearing Viktor’s signature may turn out to be the key document in the whole case.
How to structure the review so that disputes like this never arise is covered in detail in our article on due diligence before a transaction.
Whose loss is it: the company’s or the buyer’s?
It is the company that pays the supplier, and the company that pays the taxes. Kirill has not personally lost a single rouble, the sellers’ lawyers argue; his stake is simply worth less now. So who is the injured party? Frankly, this is exactly the question on which most contracts falter.
There are several ways out, and it is best to choose one before signing. Plenum Resolution No. 49 clarified that where the seller of a stake describes the company’s characteristics and the composition of its assets, the rules on the quality of goods apply to the transaction, together with the agreed liability measures. Hence the right to demand a proportionate reduction in the price under Article 475. Incidentally, in the RUB 203.9 million debt case the chamber did not reject this remedy. What counts as “proportionate” is usually a matter for the valuers to argue over.
A contractual penalty removes the need to calculate losses, but the court may reduce it under Article 333.
There is a sturdier tool, and the tax side of almost any serious deal rests on it. Article 406.1 allows the parties to agree that the seller will compensate property losses if specified circumstances occur, even without any breach on the seller’s part. The law expressly mentions claims by state authorities against a party or against a third party named in the agreement, and the company itself can be named as that third party. The amount, or the formula for calculating it, is set out in the contract, and the court may reduce the sum only if the recipient deliberately inflated its losses. This also works with individual sellers under a share purchase agreement.
One caveat, from Plenum Resolution No. 7 of 2016: the clause must be clear and unambiguous, otherwise the court will read it as ordinary liability for breach. And the recipient will still have to prove the losses themselves, whether already incurred or unavoidable.
Kirill had no such clause. His lawyers are pursuing damages and a price reduction, which is a noticeably longer road.
What the contract must contain before signing
Put together everything that tripped up Kirill’s deal and you get a short checklist, which we run through in every share purchase agreement:
- the representation on debts is tied to the balance sheet and a schedule of liabilities, not to the phrase “there are no debts”;
- tax risks are covered not only by a representation but also by an indemnity clause that names the company itself;
- the contract sets the deadline for the buyer to notify the seller of a claim and how the seller takes part in the dispute;
- everything the seller has disclosed is gathered in a single schedule;
- part of the price is held in escrow or paid on a deferred basis.
A separate word on the cap. Kirill’s claims came to roughly RUB 63 million in total against a ceiling of RUB 60 million. There is an argument that the cap does not cover a knowingly false representation: the law does not allow liability for an intentional breach to be limited in advance, and Viktor signed that very reconciliation statement. The argument is strong but not conclusive: we have yet to see settled case law on caps in share purchase agreements.
The escrow that Kirill gave up for the sake of speed would now spare him half of the correspondence. In our deal to sell a fishing industry holding, payments went through escrow precisely so that neither side would later have to chase the money.
It makes sense to draft the representations and the indemnity clause alongside the due diligence, not after it. As part of our M&A transaction support, we tie every risk we find to a specific clause of the contract, and we agree the plan and the cost of the work in writing before we start. The limitation period for a claim is usually three years from when the buyer learned of the breach, but the letter to the seller is best sent on the day the claim arrives.
Frequently asked questions
Is the seller of an LLC stake liable for debts they knew nothing about?+
As a general rule, yes. For agreements disposing of LLC stakes and shares, the law imposes liability for inaccurate representations regardless of whether the seller knew they were untrue. This can be changed only by an express term of the contract.
How do representations differ from an indemnity for losses?+
Representations concern facts at or before the time of the deal, and if they prove inaccurate the remedy is damages or a contractual penalty. Losses under Article 406.1 are compensated when an agreed event occurs, such as a tax claim against the company, and the court has almost no power to reduce that amount.
Can taxes assessed against the company after the purchase be recovered from the seller?+
Yes, if the seller represented that there were no tax violations and the additional assessments relate to periods before the deal. It is important to notify the seller of the audit in good time and let them take part in the dispute, otherwise the amount may be reduced.
Need an assessment of your situation?+
Send us a request: a corporate lawyer will review the contract and the claims against the company, and tell you which legal grounds to rely on and what to do first.