“Bulk sales” laws are intended to prevent business owners from defrauding or evading creditors by transferring all (or a substantial portion) of the assets of the business to another individual or entity. The law is also intended to avert the possibility of businesses selling their assets below fair market value in a “sweetheart sale,” in which the owner of the business manages to maintain a degree of control. For example, the law applies when the business assets are sold to another business that is controlled by the same owner. Virtually all states have adopted the Uniform Commercial Code that gives notice to creditors of bulk transfers of a business’s assets.
Generally, when an existing business incorporates there is no plan to defraud creditors. These companies are simply changing the form of the business, and have every intention of honoring the debts of any previous incarnations. In cases where the corporation receives the assets of the unincorporated business and assumes its debts, the bulk sales law is a mere formality. The corporation is accountable for the debts of the business transferring the assets in proportion to the value of the transferred assets.
Concern arises when the business transferring all of its assets to the corporation has debts that the corporation does not assume. The corporation’s officers should confer with a lawyer to ensure that the corporation will not be held legally responsible for those debts when it takes the assets from the other business. Bulk sales laws are intended to facilitate settling disputes around this issue.
If the company that is transferring the assets has debts that the corporation is not going to assume, the Fraudulent Transfers Act requires the corporation to take a number of steps before it can issue equities:
- The corporation must prepare a Notice to Creditors of Bulk Transfer. The notice is printed in a general circulation paper that covers the judicial district in which the property being transferred is located, at least 12 business days prior to the date of transfer of the property.
- The notice must also be published in the judicial district where the principal executive office of the prior business is located.
- Copies must be filed in each judicial district or county where the property is located and where the prior business had its principal executive office, with the county tax collector and the county recorder, at least 12 business days prior to the transfer.
If the creditors have no objection to the transfer, the corporation can take possession and title to the assets, free of all creditors’ claims. If, on the other hand, the prior business’s creditors have claims against the property, then special rules come into play under Section 6-106 Commercial Code. When a bulk transfer is about to be made the notice to creditors (Sections 6-105) has to state:
- The names and business addresses of the transferor and transferee
- All other business names and addresses used by the transferor within the last three years
- Whether all of the debts of the transferor will be paid in full, and if so, the address to which creditors should send their bills
If the debts of the transferor are not to be paid in full as they become due, or if there is any doubt about that, the notice must also state the following:
- Location and general description of the property to be transferred
- Estimate of the transferor’s total debts
- Address where the schedule of property and list of creditors may be inspected
- Whether the transfer is to pay existing debts
- The amount of the debts and to whom they are owed
- Whether the transfer is for new consideration
- The time and place where creditors of the transferor should file their claims
The notice must either be delivered personally or be sent by registered or certified mail to everyone on the list of creditors provided by the transferor. It must also be sent to all other people whom the transferee knows to hold or declare claims against the transferor.
In cases where the corporation is attempting to gain ownership of the property of a prior business in return for its stock, and where the creditors are asserting their rights, the corporation must either pay the creditors (which essentially means they are paying twice for the property) or place the shares in the care of the court and let it determine ownership. In this scenario the corporation may wind up with unforeseen shareholders, leading to unforeseen difficulties.