Published — January 12, 2018
The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.
Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
Related Topic: Proven Ways in Debt Collection
To prevent debtors from defrauding their creditors by secretly selling, disposing or mortgaging in bulk of all or substantially all of a merchant’s stock of goods, the Bulk Sales Law (Act. No. 3952) was passed. With this, certain formalities are required to be complied with. It is therefore important for every creditor to know what transactions are covered by the law, as well as the formal requirements for said transactions, so that they will be able to protect their credit from sly debtors who do not intend to pay their debts by fraudulently disposing their assets in bulk.
Transactions covered by the Bulk Sales Law
To be considered as transaction covered by the Bulk Sales Law, it is required that the sale, transfer, mortgage or assignment of business assets should be undertaken by the debtor not in the regular course of business [See: Sec. 2, Bulk Sales Law]. It is so because sale transactions made in the regular course of business are considered to have been undertaken based on valid business judgment where fraud cannot be presumed.
Also, to be covered by the Bulk Sales Law, the subject of the transaction should be:
- Stock of goods, wares, merchandise, provisions, or materials;
- All or substantially all of the business or trade of the vendor, mortgagor, transferor or assignor;
- All or substantially all of the fixtures or equipment used in the business or trade of the vendor, mortgagor, transferor or assignor.
Exempt transactions
Notwithstanding the coverage of the Bulk Sales Law to the above transactions, the law specifically provide that it shall not apply when:
- All the creditors executed a written sworn waiver of the application of the Bulk Sales Law [Sec. 2];
- When the sale, transfer, mortgage or assignment was carried out by executors, administrators, receivers, assignees in insolvency, or public officers acting under judicial process [Sec. 8].
Requirements to be complied with
Debtors who intend to undertake any of the covered transactions mentioned above are required by law to comply with the following within 10 days from the time of the intended sale, transfer mortgage or assignment:
- To make a full detailed inventory of the stock of goods, wares, merchandise, provisions or materials in bulk, showing the quantity, and so far as possible with the exercise of reasonable diligence, the cost/price of the said items [See: Sec. 5].
- To notify all creditors of the price, as well as the terms and conditions of the intended transaction [Ibid].
Aside from the inventory and notice to the creditors, the debtor is likewise required by law to deliver to his buyer, transferor, mortgagee or assignee a sworn statement listing the following:
- The names and addresses of the creditors;
- The amount of indebtedness due or owing, or to become due or owing to each creditor [Sec. 3].
The statement should likewise contain a declaration 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” [Ibid].
What constitutes violation of the Bulk Sales Law?
Whenever any person shall sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions or materials, in bulk, he is prohibited to:
- Receive any part of the purchase price without first delivering to the buyer or mortgagee the sworn statement listing the creditors and their addresses, and without applying the purchase or mortgage money of the said property pro rata to the payment of the bona fide claims of the creditors [Sec. 4].
- Transfer title to the goods to the buyer without consideration, or for a nominal consideration only [Sec. 7].
Effect of violation of the law
Violation of the Bulk Sales Law shall render the sale, transfer or mortgage void for being fraudulent [See: Sec. 4]. The seller, transferor, mortgagor or assignor shall likewise be held criminally liable and may be meted out the penalty of imprisonment from 6 months to 5 years, or a fine of not more than Php 5,000.00, or both, upon the court’s discretion [Sec. 11].
Given the protection afforded by the Bulk Sales Law to creditors, it is now incumbent upon them to know their legal rights so that they will be able to avoid being defrauded by their debtors who do not intend to pay their dues. It is important for such creditors to ensure that their debtors’ assets remain intact and within their reach, so that they would still have some way to enforce their claims against their debtors, and not render their credits useless.
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding credit and debt collection laws, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
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