Monday, April 13, 2009

The Incredible Bulk Sales Law

By Siesta-friendly

Okay, maybe only as far as creditors are concerned. Even then … maybe not. Anyway, the Bulk Sales Law (as amended)[1] is there to protect creditors from sneaky debtors who want to unload their assets to keep them away from paying for their debts.

What’s covered

Not all assets are covered though. Only the “sale, transfer, mortgage or assignment” by the debtor of:

a) a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business, or

b) all, or substantially all, of the business or trade, or

c) all, or substantially all, of the fixtures and equipment used in and about the business the law

are subject of the law. (Section 2) Thus, the law contemplates only those doing business, be they individuals or firms.

Who are covered

As to creditors, only those whose claims (whether due or not) existed before the sale, transfer, mortgage or assignment of the assets are protected by the law.

Exemptions

The law specifically exempts from its application the following instances:

a) any sale, transfer, mortgage or assignment by “executors, administrators, receivers, assignees in insolvency, or public officers, acting under judicial process” (Section 8), and

b) when the creditors execute sworn written waivers of the application to them (and their claims) of the provisions of the Bulk Sales Law. (Section 2)

Requirements

When the debtor is planning the sale, transfer, mortgage or assignment of the assets listed above, he/it (if a firm) must, at least 10 days before the sale, transfer or execution of the mortgage:

1) make a full detailed inventory of goods, wares, merchandise, provisions or materials involved showing the (1) quantity and, so far as is possible with the exercise of reasonable diligence, (2) the cost price of each article, and

2) notify every creditor of the price, terms and conditions of said sale, transfer, mortgage, or assignment. (Section 5)

Afterwards, the debtor (and would-be seller, transferor, mortgagor or assignor) must deliver to the buyer, transferee, mortgagee or assignee either:

a) a sworn written statement listing the (1) names and (2) addresses of all creditors together with the (3) amount of indebtedness due or owing, or to become due or owing to each creditor, followed by an (4) affirmation that “there are no creditors holding claims due or which shall become due, for or on account of goods, wares, merchandise, provisions or materials purchased upon credit or on account of money borrowed, to carry on the business of which said goods, wares, merchandise, provisions or materials are a part, other than as set forth in said statement” (Section 3), or

b) a sworn written waiver of the provisions of Bulk Sales Law executed by all creditors. (Section 2)

Prohibitions

These are the 2 specific instances prohibited under the law:

a) any sale, transfer, mortgage or assignment of the assets, for cash or on credit, without having first delivered to the buyer, transferee, mortgagee or assignee, the sworn written statement required, and “without applying the purchase or mortgage money of the said property to the pro rata payment of the bona fide claim or claims of the creditors”. (Section 4)

b) any transfer of title by the owner of any stock of goods, wares, merchandise, provisions or materials, in bulk, without consideration or for a nominal consideration only. (Section 7)

Just remember the golden rule: don’t forget the creditors because you owe them.

Consequences

A violation of the law renders the sale, transfer, mortgage or assignment void. Thus, the purchaser has no rights to the assets as against the creditors. He is a mere trustee, or receiver for the benefit of all the creditors.

An innocent purchaser for value is not liable to the creditor. The creditor can only go after those who knew that the law was violated. But remember another golden rule: ‘ignorance of the law excuses no one’ so the debtor-seller and immediate purchaser are expected to know the law’s requirements. If the law was violated, they can’t claim they weren’t aware of them.

If not all creditors were defrauded, then the sale, transfer, mortgage or assignment is void only as to those defrauded.

Penalty

Since a violation of this law is a criminal act, the penalty may be imprisonment of not less than 6 months nor more than 5 years; however, the court has discretion to instead impose a fine of not more than P5,000.00, or impose both such imprisonment and fine. If a firm, the actual perpetrators are liable. It is just unfortunate that the penalties need (much higher) adjustment.




[1] Act No. 3952, “An Act To Regulate The Sale, Transfer, Mortgage Or Assignment Of Goods, Wares, Merchandise, Provisions Or Materials, In Bulk, And Prescribing Penalties For The Violation Of The Provisions Thereof”. December 1, 1972.


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