Selling your business can be motivated by many factors such as inability to continue the business, business losses, buy-out by a competitor, handsome offer by an investor, to name a few. The decision to sell your business will depend upon your sound business judgment and forecasts on the movement of the market. Whatever reason impels you to sell your business, the law has provided for a proper procedure to proceed with such sale.
Act No. 3952, as amended by Republic Act No. 111, otherwise known as the Bulk Sales Law primarily governs the sale of a business. This law is aimed at protecting creditors and suppliers from the sale by merchants or debtors of their business unduly prejudicing the former’s rights.
However, it must be noted that not all sales are covered by this law. In order for the Bulk Sales Law to operate, the sale or transfer must be done in bulk. As such, Section 1 of the Bulk Sales Law considers any of the following as sales in bulk:
1. Any sale, transfer, mortgage or assignment of a stock of goods, wares, merchandise, provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor, mortgagor, transferor, or assignor
2. Any sale, transfer, mortgage or assignment of all, or substantially all, of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor,
3. Any sale, transfer, mortgage or assignment of all, or substantially all, of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor, or assignor.
Not all bulk sales are under the purview of the Bulk Sales Law. The following transactions are not covered:
1. If the seller, mortgagor, transferor or assignor produces a written waiver of the provisions of the Law from his creditors as shown by verified statements;
2. Executors, administrators, receivers, assignees insolvency or public officers acting under processes of law.
If the sale of your business is covered by the Bulk Sales Law, then you need to do four things, to wit:
1. Delivery of the Sworn Statement of Listing of creditors to the buyer or mortgagee
2. Written advance disclosure to the creditors
3. Application of the proceeds
4. Recordal of the sworn listing with the Department of Trade & Industry (DTI)
Anent the first step, before you receive any of the purchase proceeds from your buyer, you must deliver to the buyer a written statement of the names and addresses of your creditors together with the amount of indebtedness owing to each creditor.
With regard to the second step, you must, at least ten days before the sale, transfer or execution of a mortgage upon any stock of goods, wares, merchandise, provisions or materials, in bulk, make a full detailed inventory thereof and to preserve the same showing the quantity and, so far as is possible with the exercise of reasonable diligence, the cost price to the vendor, transferor, mortgagor or assignor of each article to be included in the sale, transfer or mortgage, and notify every creditor whose name and address is set forth in the verified statement of the vendor, transferor, mortgagor, or assignor, at least ten days before transferring possession thereof, personally or by registered mail, of the price, terms conditions of the sale, transfer, mortgage, or assignment.
As to the third step, you must apply the purchase money to the pro-rata payment of the bona fide claims of the creditors as shown in the verified statement.
The requirements under the Bulk Sales Law must not be taken lightly. If the sworn listing is not prepared and delivered and the pro rata payments not made to the creditors, such sale or transfer of business is considered fraudulent and void. As such, the sale is not valid and no transfer or properties or business results therefrom. This effect is regardless of the motive or good faith of the seller.
Furthermore, violation of the Bulk Sales Law opens the seller to criminal liability of imprisonment not less than six months, nor more than five years, or fined in sum not exceeding five thousand pesos, or both such imprisonment and fine, in the discretion of the court.
However, non-compliance with the second step (written disclosure to the creditors) and fourth step (recordal with DTI) will not affect the validity of the sale or transfer.
It bears great emphasis that it is also unlawful for any person, firm or corporation, as owner of any stock of goods, wares, merchandise, provisions or materials, in bulk, to transfer title to the same without consideration or for a nominal consideration only.
Nicolas & De Vega Law Offices is a full service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 4706126, +632 4706130, +632 4016392.