How Does Bulk Sales Law Work?
State and Federal Fraudulent Transfer Laws
A bulk sales law isn't about selling in bulk. Rather, these federal and state laws are about a business selling business assets to one buyer outside of the normal course of business. Bulk sales are sometimes called bulk transfers because they are often transferred to another business entity. Bulk sales laws restrict these sales for two reasons:
- In business bankruptcy, laws prohibit businesses that are in the bankruptcy process from selling or transferring assets to avoid having to give the assets to creditors or transferring them for less than they are worth.
- Some businesses attempt bulk sales or transfers to avoid sales taxes. The sales taxes must be paid by the buyer.
Laws Affecting Bulk Sales
State bulk sales laws are enacted to prevent businesses from avoiding sales taxes. Federal laws on bulk sales relate to preventing attempts to keep assets from creditors in bankruptcy.
State bulk sales laws fall under the Universal Commercial Code (UCC) since they involve credit. Each state has its own UCC regulations and each state handles bulk sales differently. In Pennsylvania, for example, bulk sales regulations kick in when 51 percent of a business' assets are sold or transferred. At this point, a bulk sale clearance certificate is required.
On a federal level, the Uniform Fraudulent Transfers Act, The Federal Rules of Bankruptcy Procedure and Chapter 11 of the Bankruptcy Code both apply to bulk sales or transfers for businesses in bankruptcy. The bankruptcy court requires notices to sell assets and fair procedures to make sure assets are not sold for less than their value. But you can sell assets in bankruptcy if you follow proper procedures. The bankruptcy code provides that transfer taxes won't be applied if the sale takes place under bankruptcy rules.
What's an Illegal Bulk Sale and What Is Not?
If a company is going out of business and it sells its inventory at an auction, with many buyers at some fair value, this isn't a fraudulent bulk sale. While the auction isn't in the ordinary course of business, it is public and the assets can be counted and the proceeds used in the bankruptcy process.
Before a bulk sale, in most jurisdictions, the business must file some kind of statement or affidavit to let creditors know that the sale is taking place. States require registration of bulk sales so that the sales taxes due can be collected. In New York, for example, the purchaser must notify the state of a pending bulk sale by completing a form reporting "Notification of Sale, Transfer, or Assignment in Bulk."
A bulk sale that is not within the law includes elements such as:
- A sale of assets beyond the normal course of business,
- The sale is to just one party,
- For which there is not adequate payment, and
- Which is done in secret with the intent to defraud. It may also be without intent but the effect is fraudulent.
Bulk Sales and Credit
Many businesses, including especially retail businesses, operate on credit. They buy inventory on credit hoping to sell it for a profit before the credit terms come due. Selling these assets in bulk to avoid creditors causes two problems: (1) the assets haven't been paid for yet, so that specific creditor doesn't get its money, and (2) the assets are gone, so they can't be sold to pay off the creditor.
What Is the Penalty for a Bulk Sale?
The penalties for violation of bulk sales laws depend on federal bankruptcy laws and on bulk sale laws in the state where the bulk sale took place.
What Are Fraudulent Transfers?
Fraudulent transfers are similar to bulk sales. These transfers are fraudulent because they attempt to defraud creditors in a bankruptcy by transferring assets out of one business to another or selling them for less than they are worth. In these cases, the business moves assets to a related company or another company owned by the same owner. The creditors are deprived of the money from the sale of these assets.
How to Comply With Bulk Sales Laws
To avoid problems with bulk sales laws, don't make any transfers that could be seen as a bulk sale without checking with your attorney. If your business is in bankruptcy proceedings, be sure to check with your attorney or your trustee (if you have one) before you make any decisions.
If you are considering a sale or transfer of assets, also contact your attorney and alert the buyer that sales tax may have to be charged.