What is the bulk sales trust?
Bulk Sales Escrow is an escrow arrangement in which proceeds from the sale of a business or its inventory are placed in a special account, which the seller is prohibited from accessing, to ensure that the proceeds are associated unsecured creditors get their due cash.
Typically used when a business is struggling, this arrangement reduces the risk of the seller misappropriating the proceeds of the sale, to ensure that money is responsibly funneled toward paying debts or taxes owed.
- A bulk sales escrow is a financial arrangement whereby the income and / or inventories of a business are held on deposit until creditor claims are satisfied.
- Funds or assets held in custody are temporarily transferred and held by a third party, usually on behalf of a buyer and a seller to facilitate a transaction.
- Such an agreement can be used by a business that is struggling to avoid a default or other credit event.
- Creditors can structure a bulk sales escrow to secure unsecured debts owed to them.
Understanding the Bulk Sales Escrow
“In escrow” is a type of legal hold account for items, which cannot be released until predetermined conditions are met. Items are generally held in escrow until the process involving a financial transaction is completed.
When a business experiences financial difficulties, it can generate funds by downsizing its business or selling parts of its inventory and / or business assets. To ensure that the proceeds from these liquidity events are not wasted on further reckless or unprofitable business decisions, a bulk sales escrow agent holds the funds until the transfer of the assets is complete, before sending the funds to the corresponding end parts. Relevant assets and cash will be held in custody until all specified conditions, outlined in the bulk sales custody agreement, are met and the transfer of ownership can occur.
Although the fees for this service are traditionally paid jointly by buyers and sellers, the escrow agent can design any payment model, as long as both parties agree.
Trust agreements provide security by delegating an asset to a trust agent for safekeeping until each party fulfills its contractual obligations.
Bulk Sales Trust Example
Suppose XYZ Corporation has experienced several quarters of declining revenue, up to lagging sales of outdated products. To make up for this loss, the company has been routinely borrowing large sums of money. Consequently, it becomes insolvent, because its liabilities far exceed its assets. To stay afloat, the company sells a portion of its operations to another corporation.
In these circumstances, XYZ Corporation’s unsecured creditors may structure a bulk sales escrow agreement with the company, as a protective measure that gives them peace of mind knowing that they will be first in line to seize the money. generated by that sale.
If XYZ Corp. can somehow recover from its financial condition, the escrow agreement may be terminated if satisfied and approved by its creditors. However, if XYZ fails, the funds and assets held in custody will be transferred to the creditors.