A fundamental feature of a business entity is the liability protection that it affords its owners. If your business is a corporation or limited liability company, the owners are not liable for any debts incurred by the company. Therefore, as a general rule, if the business borrows money but is later unable to make repayment, the lender cannot seek repayment from the owners personally. Lenders sometimes try to avoid that risk by asking the owners to personally guarantee the debt. Other times, lenders will take a security interest in some of the property of the business as security against a default.
But when a lender extends credit to a company without gaining a personal guarantee or taking a security interest, the lender faces the risk that the company will sell its business assets in bulk, leaving the corporation as an empty shell. The corporation still owes the debt but it no longer has assets with which to pay the debt. The Maryland bulk sales act was created to minimize that risk by requiring notice to such creditors before the sale.
The Maryland bulk sales act requires that a purchaser of a major portion of a seller’s inventory give advance notice of the impending sale to the seller’s creditors. This permits the creditors to protect their interests while the inventory is still owned by the seller. It also permits the creditors to take steps to require the purchaser to pay the creditors from the proceeds of the sale.
The Maryland bulk sales act applies to transfers of a major part of the inventory of any business that sells merchandise, including most retail sales businesses, restaurants, and liquor stores. It does NOT apply to sales in the ordinary course of business, such as a small business that routinely sells a large portion of its inventory.
The Maryland Bulk Sales Act imposes five requirements:
First, the purchaser must ask the seller for a sworn list of its existing creditors. Second, the buyer and seller must prepare a detailed list of the property that is subject to bulk transfer. Third, the purchaser must make those two lists available to satisfy for inspection for six months after the transfer. Fourth, the purchaser must notify each of the seller’s creditors of the pending sale at least ten days before the purchaser pays for the property or the property is transferred, whichever occurs first. Finally, the purchaser must make sure that the proceeds from the sale are used to pay the debts.
Compliance with the Bulk Sales Act offers a very important protection for buyers and sellers because it means that creditors must bring any claim for any alleged violation of the Bulk Sales Act within six months of the sale.
Despite the benefit of compliance, because of the burdens associated with compliance, it is very common for parties to a sale to agree to waive the bulk sales act’s requirements. That is perfectly permissible and it does not render the sale invalid. However, the consequence of waiving the bulk sales act is that the creditors can seek to collect payment by putting a lien on the property, even though it is now owned by the purchaser rather than the seller.
In a related matter, buyers and sellers of businesses must also consider the bulk sales tax. Any sale of a business’s assets (including most transactions triggering the Bulk Sales Act) requires payment of a Bulk Sales Tax. This is a tax on the assets of a business when the business’s assets are sold. The tax does not apply to intangible assets, such as goodwill and intellectual property, and it does not apply to inventory (which will be taxed when it is sold to the public), but it does apply to the other assets of the business that are sold. The tax is six percent of the value of the taxable property.