Series Index
Part 1 | Unpaid Corporate Transactions: Liability Behind the Veil
Part 2 | Trade Name Continuity and the Liability of a Successor
By Hong Seung-kwon
Principal Attorney, PAN Law Firm (skh@law-pan.com)
One day, the owner of a long-established neighborhood restaurant changes. Yet the signboard remains the same. The menu is similar, and the interior is largely unchanged, so from a customer’s perspective, it appears to be the same place they have always visited.
But what if the business had been transferred while leaving unpaid invoices owed to suppliers? When a supplier visits the restaurant, the new owner claims that the debt has nothing to do with them and insists that payment should be sought from the previous owner. Meanwhile, the former owner is no longer reachable. Must the supplier simply absorb the loss?
The issue addressed here is whether, in such a case, the supplier can claim the debt from the new owner.
Article 42 of the Korean Commercial Act provides that when a person who acquires a business continues to use the former owner’s trade name, they may also be held liable for debts arising in connection with that business. This is referred to as “liability of the transferee due to the continued use of a trade name.”
The rationale for this rule is straightforward: to protect transaction counterparties. For those who have dealt with a business under a particular trade name over a long period, that name represents not merely a label, but an accumulation of trust, reputation, and transactional history. If the owner changes while the same trade name continues to be used, counterparties may not even realize the change. In such cases, they risk suffering losses if payments are not made or promised goods are not delivered.
When a Business Transfer Is Recognized
Under what circumstances is such liability recognized? While several conditions apply, two are particularly important.
First, there must be a transfer of the business. Whether a business transfer has actually occurred is determined from a substantive perspective. It is not decided solely based on the title or wording of a contract.
As the courts have articulated, the determination depends on whether the transferee has taken over functionally organized assets that serve as a source of profit and continues the same business activities previously conducted by the transferor.
In simpler terms, the key consideration is whether essential elements of the business—such as customers, inventory, facilities, and personnel—have been transferred, and whether the same business is effectively continuing.
Why Continued Use of a Trade Name Matters
Second, the trade name must continue to be used. It does not have to be identical in every detail. It is sufficient if the core elements of the name remain such that an ordinary person would perceive it as the same business. Accordingly, identifying what constitutes the “core” of the trade name is crucial. This determination ultimately depends on the circumstances of the business transfer and the need to protect creditors—specifically, whether there is a likelihood of confusion from the creditor’s perspective.
Consider the following example. A company that had operated a hotel business for many years falls into financial difficulty, and another operator acquires the business and continues hotel operations in the same building. The key part of the hotel’s name remains unchanged. While employees are not retained, the rooms and business relationships are effectively carried over.
The new operator has no particular connection to the former hotel and has no intention of evading debt. If there are creditors of the former hotel, can they demand payment from the new operator?
As noted earlier, a business transfer must be assessed substantively. In the context of a hotel, employees, rooms, and business relationships are all important, but the most critical elements are arguably the rooms and the business relationships. Therefore, whether the same rooms continue to be used, whether relationships with suppliers—such as vendors providing goods or laundry services—have continued, and whether reservation platforms have been maintained are key factors in the analysis.
As for whether the core part of the hotel’s name continues to be used, the determination should also take into account the criteria used in assessing the business transfer, as well as the need to protect creditors. Relevant considerations include whether the creditor took steps to protect its claims, whether there was a likelihood that the creditor would mistake the new hotel for the old one, and whether there are circumstances suggesting an intentional evasion of debt obligations.
Although these criteria provide some guidance, determining the existence of a business transfer and trade name continuity is not straightforward. Nevertheless, it is an issue worth examining, as liability may indeed arise under certain conditions.
There is also the possibility that a good-faith transferee may suffer disadvantage if liability for trade name continuity is recognized. However, the Commercial Act allows the transferee to avoid such liability by registering that they do not assume responsibility for prior debts at the time of the business transfer. Therefore, if one acquires a business, taking such measures is advisable.
About the Author
Hong Seung-kwon is the managing attorney of Pan Law Office in South Korea. His practice covers not only civil and criminal litigation but also emerging legal issues in the digital age. He regularly writes on how technology, property rights, and regulatory policy are reshaping law and markets..
