- The deal structure you used matters enormously here.
- Ontario used to have a statutory bulk-sales regime designed to protect trade creditors when a business sold off its assets — but the Bulk Sales Act was repealed in 2017, and Ontario no…
Closing day feels like a clean start. Then, weeks or months later, a letter arrives from a creditor you'd never heard of, or a tax arrears notice shows up for a period before you ever owned the business. Whether that liability is actually your problem — and what you can do about it — depends heavily on one thing above all else: how the deal was structured.
This article walks through why undisclosed liabilities surface, what your purchase agreement should already be doing to protect you, and the practical steps to take when one turns up.
Why Undisclosed Liabilities Are More Common in Share Sales
The deal structure you used matters enormously here. In a share sale, the buyer acquires the shares of the corporation itself — and the corporation's entire history, known and unknown, comes with it. In an asset sale, the buyer and seller identify specific assets being purchased and specific liabilities (if any) being assumed; liabilities not expressly assumed generally stay with the selling entity.
That distinction is exactly why the same undisclosed debt can be entirely the buyer's problem in one structure, and largely irrelevant to the buyer in the other.
Share Sale vs Asset Sale: Who Actually Owes the Money
| Share sale | Asset sale | |
|---|---|---|
| Who owns the liability after closing | The corporation you now own — undisclosed debts generally come with it | Generally stays with the seller's corporation, unless specifically assumed in the agreement |
| Your main protection | Representations, warranties, indemnities, and the disclosure schedule negotiated into the purchase agreement | Careful drafting distinguishing assumed liabilities from excluded liabilities |
| Employee-related obligations | The employer entity doesn't change, so continuity is automatic | Governed separately by Ontario's Employment Standards Act, 2000, depending on whether the business is sold as a going concern |
| Practical due diligence tool | Full corporate, financial, and litigation history review before closing | Lien and title searches against the specific assets being purchased |
Why There's No "Bulk Sales" Safety Net Anymore
Ontario used to have a statutory bulk-sales regime designed to protect trade creditors when a business sold off its assets — but the Bulk Sales Act was repealed in 2017, and Ontario no longer has that kind of statutory creditor-notice requirement for a business asset sale. Some buyers and even some advisors still assume "bulk sales compliance" is a live legal safeguard. It isn't. Today, protection against undisclosed seller liabilities comes entirely from contractual tools — due diligence, representations and warranties, indemnities, holdbacks — and, for real property, title insurance.
What the Purchase Agreement Should Already Give You
A well-drafted purchase agreement anticipates exactly this scenario:
- Representations and warranties about the target's liabilities, litigation history, and tax compliance
- A disclosure schedule listing known liabilities, so anything not disclosed there may breach the seller's representations
- Indemnities requiring the seller to compensate you for losses from undisclosed liabilities that breach those representations
- A holdback or escrow — funds set aside at closing to cover exactly this kind of post-closing surprise
If your agreement includes these (and most competently drafted ones do), your first move is usually to check whether the newly discovered liability falls within their scope and any notice deadlines they impose.
Steps to Take When a Liability Surfaces
- Confirm the liability is real and accurately dated. Get documentation showing what it is, how much is claimed, and — critically — whether it relates to a period before or after closing.
- Pull your purchase agreement and disclosure schedule. Was this liability disclosed anywhere, even indirectly?
- Check your notice deadlines. Many indemnity provisions require you to notify the seller of a claim within a defined window — missing it can cost you the remedy entirely.
- Assess whether a holdback is still available to draw against, or whether it has already been released.
- Get legal advice before paying or ignoring the claim. Paying a disputed liability without first understanding your indemnity rights can complicate your recovery later.
When the Liability Involves a Secured Creditor or Lien
Some undisclosed liabilities aren't just unpaid bills — they're registered security interests against the business's equipment, inventory, or other assets under Ontario's Personal Property Security Act. A pre-closing lien search is standard due diligence precisely to catch these before closing. If one surfaces afterward that wasn't disclosed or discharged as promised, that's typically both a breach of the purchase agreement's representations and a practical problem requiring prompt attention, since a secured creditor's rights against the actual equipment or inventory can exist independently of any dispute you have with the seller.
Frequently asked questions
We did a share sale — does that mean we're stuck with everything?
Not necessarily "stuck." You inherited the liability as a matter of corporate ownership, but your purchase agreement's representations, warranties, and indemnities may still give you a claim back against the seller for the loss. The liability being yours to deal with and the loss being recoverable from the seller are two different questions.
The seller says they didn't know about the liability either — does that matter?
It can affect whether the seller breached a representation (many representations are given regardless of the seller's knowledge, while others are qualified by "to the seller's knowledge"). Read exactly how your specific representation was worded before assuming either way.
Can we go after the original creditor's claim and the seller's indemnity at the same time?
Often yes — dealing with the creditor's claim (or defending against it) and pursuing your indemnity rights against the seller are generally separate tracks, though how you handle one can affect the other. It's worth coordinating both with a lawyer rather than handling them independently.
What if the liability is a lien we should have caught with a search before closing?
A missed lien search is a due diligence gap, but it doesn't automatically eliminate a claim against the seller if the lien or the underlying debt should have been disclosed. It may, however, affect arguments about your own diligence. This is worth reviewing carefully with a lawyer.
This is a business purchase or sale question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.