Bulk Sales Act: In Laymen Terms
Author: Puru Grover
As a creditor have you ever come across a situation when a company, say company X was bought over by Company Y. When you approached X for payment you were told to go to Y and when you went to Y they told you that they were not responsible since they only bought the assets of X. Sounds familiar?
What have you done in a case like the above?
In a case like the one for X and Y there is legislation to prevent X from selling or disposing its assets in bulk to Y and then pocketing all the money obtained from the proceeds of the sale. The legislation is called the ‘Bulk Sales Act’. The Act is designed to prevent business owners from secretly transferring their business assets to another company to avoid paying creditors. These laws apply mainly to retail, wholesale and manufacturing businesses. Basically, a bulk sales law requires X to notify creditors that the assets of the business are being transferred to Y.
Individual State or provincial laws may vary but they usually provide for some exemption or shortcuts when the assets are being transferred to a new corporation that will be taking over and continuing an existing business. A key element generally is that Y agrees to take over the business debts of the X.
The Act provides for the distribution of the sale proceeds of X’s (the seller) assets on a pro rata basis among the creditors.
Generally speaking a trustee gets appointed and Y pays the trustee the purchase price. X provides the trustee with a list of all creditors and the amounts owing to them. The trustee has a duty to hold the purchase price money for distribution among creditors of X.
A trustee need not be appointed if:
- the claims of unsecured creditors X do not exceed a certain amount (find this figure for your state or province)
- the claims of secured creditors X do not exceed a certain amount (find this figure for your state or province)
- X produces a statement showing that all claims to secured and unsecured creditors have been satisfied
- the Creditors have given a waiver
- X has made provisions for paying the secured and unsecured creditors upon completion of the sale in a predetermined manner.
As a creditor you should be careful when your customer who owes you money seeks a waiver. You could lose your rights under this act.
The Act may not apply to some of the following situations:
- Sale in bulk by an executor or administrator
- A secured creditor executing on their security
- Sale by a Receiver during Receivership
- Sale by a Trustee during Bankruptcy
- Sale by a Public official complying under a judicial process
Businesses subject to this act are those that mainly sell merchandise from stock.
One of the conditions for the sale to be effective is to give a notice to all creditors of the seller, around ten to twelve prior to taking possession of the goods or paying for them, whichever comes first. Creditors that become creditors after the Sale are not entitled to this notice.
The buyer is obliged to make sure that the Act has been adhered to and bears the risk of finding that the sale is void if the seller failed to comply. If the sale is attacked and becomes void then the buyer has already taken possession of the assets in bulk then the buyer bears the risk of personal liability to the account of the creditors of the seller, for the value of the stock
A purchaser acquires the legal title to the goods even if the sale in bulk is attacked within the statutory period. The person upholding the sale in bulk has the burden of proving that the act was complied with. If a creditor notes that the provisions of the Bulk Sales Act have not been complied with, then any such action has to be brought to the attention of the respective courts within the six-month period set by the statute in most states and provinces.
The times lines and descriptions given in this article are mere guidelines. As a creditor if you need to question a particular sale and if the Bulk Sales Act would apply to that sale, then please check with an attorney.
UPDATE March 2017:
The Bulk Sales legislation (Ontario) was not popular and deemed as an unnecessay impediment to conducting business. In March of 2017 the 'Burden Reduction Act' received Royal Assent which repealed the Bulk Sales Act. So, now the legislation that protected the creditors in the event that they could prove that the debtor sold bulk of the assets of a business was in non-compliance...rests in peace in Canada!