He sold his company for PLN 87.4 million. After 19 months the buyer demanded PLN 11.3 million back

In September a man I had not met before called me and asked to meet that same day. In the afternoon he put in front of me a letter from the buyer of his former company and, next to it, the share purchase agreement, which he had not opened since the day he signed it. Nineteen months earlier he had sold the company for PLN 87.4 million. Now the buyer was demanding PLN 11.3 million back from him and had given him fourteen days to reply.

The first claim arose from a tax audit covering the two years before the deal. The tax office challenged the way some costs had been accounted for and, with interest, put the arrears at PLN 6.8 million. The second claim concerned a dispute with a large customer over quality complaints. That dispute was already under way during the negotiations, and the customer eventually obtained PLN 4.5 million from the company.

My visitor was convinced that once the deal had closed, only the buyer was responsible for the company. The agreement said otherwise. In it he had signed several dozen sentences about the company’s past, and he was liable for each of them with his own money.

I have changed the details so that neither the company nor the parties can be identified.

What the seller signs

Representations and warranties are the part of the share purchase agreement in which the seller describes the condition of the company as at the signing date, and often also as at the closing date. For example: the company has paid all taxes due and all social security contributions due to ZUS, the Social Insurance Institution. It is not a party to any court proceedings. It holds the rights to its trademarks and software. Its financial statements are reliable.

Even after due diligence, the buyer does not know the company’s history as well as the seller does. The representations shift to the seller the risk of whatever due diligence did not uncover. If any of these statements turns out to be untrue and the buyer suffers a loss as a result, the seller hands back part of the price he received.

I treat this part of the agreement as an insurance policy that the seller writes for the buyer on the company’s past. It runs for several years, and the seller receives no separate premium for it.

Fundamental representations state that the seller owns the shares, is able to sell them and that nobody else has any rights to them. For these, the seller is usually liable up to the full price. Business representations cover taxes and ZUS contributions, contracts, employees, disputes and the company’s assets. Liability for them is subject to limits the parties agree in the contract.

Sellers sign this part of the agreement without reading it carefully, because a lawyer negotiates it in the last weeks of the process, when the owner’s attention is on the price and the closing date. I wrote about this in an article on the first hundred days after a deal: the parts of an agreement that cost the most are the ones read last and fastest.

The disclosure letter: the seller’s cheapest protection

A disclosure letter is attached to the agreement. In it the seller lists everything that departs from the representations given, for example a pending dispute with a customer, an ongoing audit or a contract that the counterparty may not renew.

The buyer knows about everything in the disclosure letter before the agreement is signed. It can reflect it in the price, walk away from the table or demand that the seller give a separate undertaking to cover that specific loss if it occurs. In practice such an undertaking is called an indemnity. As a rule it is not subject to the general thresholds or caps. For a matter included in the letter, the buyer no longer has a claim for breach of the representations.

In the opening example the seller knew about the dispute with the customer and did not put it in the disclosure letter. He decided that the company would win the dispute and that disclosing it would only lower the price. The company lost, and the buyer had a ready-made claim. Disclosure would have lowered the price, but a price reduction rarely covers the whole risk. Leaving the dispute out cost the seller the full PLN 4.5 million.

Another seller in a similar situation put a pending dispute in the disclosure letter. The buyer cut the price by PLN 1.4 million and closed the deal. The dispute later ended in a PLN 2.1 million settlement, which was paid by the company when it was already under the buyer’s control. The price cut came to two thirds of the settlement amount, and the risk that the settlement would be higher passed to the buyer.

Sample wording for such a clause: “The Seller shall not be liable for any breach of the Representations to the extent that the circumstances giving rise to the claim have been fairly disclosed in the Disclosure Letter.”

The more specific the disclosure letter, the better it protects the seller. A general sentence such as “the seller discloses all information made available in the data room” is usually rejected by the buyer, because it shifts onto the buyer the burden of finding the problem among a thousand documents. Instead, the seller tries to obtain a release from liability for everything the buyer learned in due diligence. The buyer wants the opposite clause, which allows it to pursue claims regardless of that knowledge.

The limits that decide the size of claims

Three provisions of the agreement decide how much the seller may have to pay back to the buyer.

The cap. Total claims under the business representations are limited to a set portion of the price. In the mid-sized deals we work on at Capital One Advisers, this cap ranges from a dozen or so percent to thirty percent of the price. For the tax representations, the buyer often demands a higher cap.

The threshold. A single claim below an agreed amount is not taken into account at all. On top of that there is an aggregate threshold: the buyer can bring claims only once their total exceeds a set amount. Once it is exceeded, the buyer recovers, depending on the agreement, either the whole amount from the first zloty or only the excess over the threshold. Both thresholds protect the seller from a list of petty grievances, each of which costs more in time than in money.

The time limit. Claims under most representations expire between one and two years after the deal closes. In tax matters the time limit is aligned with the limitation period, after which the tax office can no longer demand payment. As a rule, a tax liability becomes time-barred five years after the end of the calendar year in which the tax payment deadline fell. Corporate income tax (CIT) for 2025 had to be paid by the end of March 2026, and that liability will not become time-barred until the end of 2031. The limitation period can be suspended or interrupted. Among other things, it is suspended by the initiation of fiscal criminal proceedings connected with the non-payment of that tax, if the company is notified of them. This provision still applies, because in June 2026 the President vetoed the bill that was meant to repeal it.

In the opening example the agreement set the cap at 15% of the price, or PLN 13.1 million. The two claims totaled PLN 11.3 million, which is 12.9% of the price and PLN 1.8 million below the cap. So the cap did not reduce the amount claimed.

ZUS contributions have a different limitation period from taxes

The tax representations usually cover ZUS contributions as well. The definition of taxes in the agreement should expressly list contributions to social insurance and health insurance, to the Labour Fund and to the Guaranteed Employee Benefits Fund, together with interest and the additional fee.

Contribution liabilities become time-barred five years after the day they fell due, separately for each month. A limited liability company pays its contributions by the 15th day of the following month. Contributions for December 2025, payable by January 15, 2026, will become time-barred in mid-January 2031, almost a year earlier than CIT for the same year.

This period can be extended considerably. When ZUS opens proceedings on whether someone is covered by social insurance, on the contribution base or on the obligation to pay contributions, the limitation period is suspended until the day the decision becomes final. The statute sets no upper limit on this suspension. If the company appeals to the court, the limitation period does not run for the whole duration of the dispute.

Overdue contributions also bear default interest, calculated on the same basis as interest on tax arrears. ZUS can also impose an additional fee of up to 100% of the unpaid contributions.

Since July 8, 2026, the risk of unpaid contributions has been greater. Under the amendment of March 11, 2026 to the Act on the National Labour Inspectorate (PIP), a PIP district inspector can issue a decision declaring that an employment relationship exists where the parties have signed a civil-law contract, including a B2B contract. A condition for issuing such a decision is failure to comply with an earlier order from a PIP inspector. The decision takes effect from the day it is issued, so on its own it does not cover earlier periods. The Inspectorate does, however, exchange data with ZUS and the tax administration, and ZUS can, in separate proceedings, establish social insurance coverage for earlier months that are not yet time-barred. The President referred the amendment to the Constitutional Tribunal, but until the ruling the provisions apply.

ZUS data of October 6, 2026 show the scale of its inspections. ZUS selects contribution payers for inspection on the basis of risk. From January to August ZUS carried out 20,529 inspections of contribution payers and found irregularities in 18,495 of them, or 90.1%. The total financial effect of these inspections was PLN 373.3 million.

That is why buyers tie the time limit for contribution claims to the limitation period of each individual liability, taking account of any suspension or interruption, and add a few months for notifying the claim. A fixed period of five years from closing may not cover contributions for which ZUS proceedings have suspended the limitation period.

A seller who sat on the board is personally liable for the company’s tax and contribution arrears that fell due during his term of office, if enforcement against the company’s assets proves ineffective. Selling the shares and leaving the board do not remove this liability, and the share purchase agreement does not limit it, because the creditor is the tax office or ZUS.

When the limits do not protect the seller

If the seller knowingly concealed a problem he was aware of, the cap and the time limit as a rule do not protect him. Whatever the agreement says, the Civil Code treats as void any clause stating that a debtor is not liable for damage caused intentionally.

That is why, in the opening example, the dispute with the customer was more dangerous than the tax audit, even though it cost less. The tax arrears were a risk nobody knew about, and all the limits in the agreement applied to them. The dispute was a known risk that was kept quiet. With a claim like that, the buyer can argue that no limit applies. If the documents on the dispute were in the data room, the seller will argue that he concealed nothing, and the outcome depends largely on the clause about the buyer’s knowledge.

In this case both claims fell within the cap, so the concealment did not change the amount. If the agreement had given the buyer eighteen months for most claims, a letter delivered after nineteen months would have been too late. The tax claim would have fallen within the longer time limit for taxes, and the claim arising from the customer dispute would have remained open only because of the concealment.

A thorough disclosure letter is the seller’s cheapest protection, and it takes several weeks of work before the first draft of the agreement. At Capital One Advisers we prepare it together with vendor due diligence, which I wrote about in an article on what a buyer looks for in a company. In this way, everything the seller knows goes into the price discussion.

Fourteen days to reply

Before replying, it is worth checking three things in the agreement.

The first is the form and timing of the notice. Agreements require the buyer to notify a claim in writing, within a set time from the day it learned of it, and to describe its basis and amount. A late or vague notice may be ineffective.

The second is double counting of the same amount. If before closing the company made a provision for the dispute or for the tax arrears, and that provision increased net debt and lowered the price, the buyer should not receive the same amount a second time. Some agreements also provide for the claim to be reduced by the tax the company saved, if it could treat the amount paid as a tax-deductible cost.

The third is conduct of the dispute. A good agreement gives the seller a say in the tax proceedings and in the dispute with the customer, and makes any settlement subject to his consent. If after closing the company, on its own initiative, amended its pre-deal tax filings, entered into a settlement or accepted the tax office’s decision without appeal, the seller may challenge the amount of the loss.

Escrow account or insurance policy

A right to claim is of little use to the buyer if the seller has already spent the sale proceeds. That is why the buyer demands security, and its most common form is an escrow account. Part of the price, usually from a few percent to a dozen or so percent, goes into an account held by a bank and stays there until the general time limit for notifying claims expires. If no claims arise, the money goes to the seller. If they do, the bank pays the buyer the amount due under the escrow agreement, on the joint instruction of the parties or on the basis of a final judgment or settlement.

Other forms are a holdback of part of the price for later payment, a right to set off claims against the earn-out, whose structure I have written about separately, and a bank guarantee.

Insurance against liability for breach of representations and warranties, known in the market as W&I insurance, is becoming more common. The policy is bought by the buyer, and sometimes by the seller. If the agreement also limits the seller’s liability to a nominal amount, claims for untrue representations are covered by the insurer, and the seller receives the full price on the closing date.

The premium is a one-off payment and is not returned. The money in an escrow account goes to the seller if there are no claims. The cost of escrow is the time during which the seller cannot use that money. A policy makes sense when the full price from day one and the transfer of claims risk to the insurer are worth more to the parties than the cost of the premium.

A policy has its limits. It does not cover what the buyer knew before signing the agreement, or anything in the disclosure letter. It usually does not cover forecasts or certain tax and environmental risks either. It also has a retention, that is, the amount of losses the insured bears itself before the insurer pays. In the case of knowing concealment, an insurer that has paid compensation to the buyer can seek to recover it from the seller.

One example of a known problem is the risk, found in due diligence, that B2B contracts will be reclassified. The buyer then demands an indemnity covering that specific loss and secures it with part of the price held in escrow.

Part of the price remains conditional. For general matters this lasts between one and two years, and for taxes and contributions until they become time-barred. For a deal closed at the beginning of a year, that means almost six years for the previous year’s CIT, and longer still if the limitation period is suspended. The same principle applies in every agreement in which one party gives representations about the company’s past, including when a fund invests in a company.

Practitioners disagree on how to secure this part of the price. Buy-side advisers prefer escrow, because the money is at hand and there is no need to fight the insurer. Sell-side advisers increasingly propose a policy, because the seller receives the full price on the closing date and does not wait years for the rest of the money.

Two things decide the choice. The first is the seller’s needs, for example buying out a partner or investing in the next project, which require the full price at once. The second is the buyer’s willingness to have an insurer stand behind its protection. In every deal these two things carry different weight, and the parties rarely settle the question early enough to reflect it in the price.

Service: M&A advisory on a company sale