Tuan (name changed), a business owner in Ho Chi Minh City, asked DEDICA:
"My company is planning to acquire a smaller competitor in the same industry by taking over its entire capital contribution. I have heard the target may still have unsettled tax debts, and that the former owner borrowed money from outside parties in the company's name without recording it in the books. I am worried that once I buy it, I will be saddled with that pile of debt without knowing. How do I check that everything is clean before signing, and if there turn out to be hidden debts, am I the one who has to bear them?"
DEDICA ADVISES The answer depends on how you buy. If you acquire the business by taking a transfer of capital contribution or shares, you are buying the legal entity itself, so every debt sitting inside the company (including unsettled tax debts and off-the-books loans) follows the company into your hands. That is the risk of hidden debt: thanks to limited liability, you will not have to use your personal assets to pay it, but the money you spend to buy the company can still be eroded. Your protection lies in two things done before signing: legal and tax due diligence, and building protective clauses into the transfer agreement. Below are the legal basis and a concrete checklist.
Buying a capital contribution means buying the whole legal entity along with its debts
This is a point many buyers overlook. When you take a transfer of capital contribution or shares, the company remains the same legal entity; only the owner changes. You are not buying individual assets one by one, but an ownership stake in an existing legal entity, together with all of its financial obligations: tax debts, loans, guarantees, debts to suppliers, and obligations to employees. The Law on Enterprises provides that a member is liable only to the extent of the capital it has contributed:
This principle cuts both ways. It protects you: the new owner's liability is limited to the capital contribution and does not reach personal assets. But it is also a risk: because debt attaches to the legal entity rather than to the owner, acquiring the entity means inheriting every debt already sitting inside it. Old tax debts remain the company's responsibility, and the tax authority may recover them from the company's assets, which are now yours; a loan or guarantee signed in the company's name and then hidden from the books becomes the company's obligation the moment the creditor appears. The Civil Code 2015 (Article 370) also allows an obligation to be transferred to another party only with the creditor's consent, so debt does not simply vanish just because the company changes hands.
The picture is entirely different if what you are buying is a sole proprietorship or a household business. There is no shield of limited liability there: the owner of a sole proprietorship is liable with all of their personal assets (Article 188 of the Law on Enterprises), so the business debts and the owner's personal debts are almost merged into one. Upon a sale, responsibility for the old debts does not automatically pass to you either:
For this business form, therefore, drawing a clear line between which debts belong to the company and which belong to the former owner personally is especially important.
Steps to check for hidden debts and protect yourself before signing
Because the risk lies inside the company, the best protection is to clarify every debt before you pay, then bind responsibility through the contract. There are two layers of work to do.
First, legal and tax due diligence before signing. You, or the lawyers and auditors you engage, should review at a minimum:
- Tax status: obtain confirmation of tax obligations from the tax authority; review tax returns, finalizations, and inspection and audit records for the most recent 3 to 5 years.
- Social insurance arrears, unpaid wages, and other obligations to employees.
- Loans, guarantees, pledges, and mortgages in the company's name: cross-check the accounting books against credit agreements, meeting minutes, and bank statements to expose off-the-books items.
- Amounts owed to suppliers and partners, and effective contracts containing large penalty or compensation clauses.
- Disputes, lawsuits, and contingent obligations relating to land, the environment, and licenses.
Second, build protective clauses into the transfer agreement. Due diligence helps you see the risk; the contract is what allocates that risk to the right party:
- Representations and warranties: the seller warrants that the company has no debts or obligations beyond those disclosed.
- Indemnification: if debts from the period before the transfer surface later, the seller must compensate you.
- A holdback or escrow of part of the price for a fixed period, to offset any hidden debts that come to light.
- Conditions precedent: the seller must complete its tax obligations or provide confirmation of no tax arrears before closing.
The right to claim compensation when the seller breaches its warranties is grounded in the Civil Code:
For a sole proprietorship or household business, remember to fix in writing who bears the old debts, with the creditors participating (Article 192 above). And if you are a foreign investor, the deal must also go through the procedure to register the capital contribution or share purchase under investment law; that is a separate topic, but the principle that buying a legal entity means buying its debts does not change.
Conclusion
In short, thanks to limited liability you are not automatically required to use your personal assets to pay the company's debts. But acquiring a business through a transfer of capital contribution or shares means buying the whole legal entity along with every debt inside it, hidden debts included. Checking that everything is clean means: (1) legal and tax due diligence before signing; (2) building representations and warranties, indemnification, and a price holdback into the contract; (3) for a sole proprietorship or household business, fixing in writing who bears the old debts. Do both layers properly, and you will be buying a business rather than mistakenly buying a pile of debt.
Before any acquisition, DEDICA can carry out legal and tax due diligence on your behalf to uncover hidden debts (tax debts, off-the-books loans and guarantees, contingent obligations), then draft and review the transfer agreement with representations and warranties, indemnification, and holdback clauses to ring-fence the risk on the seller's side. We work alongside you as your legal department, for both domestic transactions and foreign investors, with bilingual support. Contact DEDICA to have a lawyer review your specific case before you sign.
This content is for reference only; each transaction has its own particulars, so please consult a DEDICA lawyer for advice tailored to your case.
