A bulk sales escrow is an arrangement for an escrow arrangement in which the profits of sales of business or its inventory is put in a separate account where the buyer is not able from accessing to ensure that any non-secured creditors receive their due money.
Most often, when a company is in financial trouble, this arrangement lowers the possibility of the seller stealing the profits from the sale. It also guarantees that the proceeds are used to pay off tax or debts owed.
Understanding Bulk Sales Escrow
“In escrow” is a kind of legal account for goods, that isn’t released until specific conditions are met. In general, the items are kept in escrow until the procedure that involves a financial transaction has been completed.
If a company is in financial difficulties, it could be able to raise funds through a downsizing of the business or selling off parts of its inventory and/or assets. In order to ensure the funds generated by the liquidity situations aren’t squandered on more risky or ineffective business choices, a bulk sales escrow agency holds the money until transfer of assets is completed, prior to transfer of the funds to appropriate parties. The assets and cash are held in escrow until all requirements, as laid out within the bulk sale agreement for escrow is met and ownership transfer can be completed.
While the costs associated with this type of service typically paid jointly by the sellers and buyers the escrow agent is able to come up with any payment system in the event that both parties are in agreement with it.
Example of Bulk Sales Escrow
Let’s suppose that the XYZ Corporation has experienced several months of declining revenue, due in addition to slow sales of outdated products. In order to compensate for the loss, the business has been regularly borrowing huge amounts of money. In the end, it is insolvent as its obligations exceed its assets. To stay in business, the company is forced to sell the majority of its assets to a third business.
In these situations, the unsecured creditors of XYZ Corporation could negotiate a bulk sale agreement for escrow with the business, as a safeguard that allows them to rest assured being the first in line to claim any proceeds generated by the sale.
In the event that XYZ Corp. is somehow in a position to improve its financial difficulties and recover from its financial situation, the escrow contract could be terminated if it is satisfied and the approval of its creditors. In the event, however, XYZ fails, the money and assets in escrow will be released to creditors.
