In response to a reader question, My Business explores whether it is possible for creditors to stop a business from being sold.
My Business regularly receives questions and queries from readers related to their business. Below is one such question we received recently:
“I’m a business owner who is in the process of completing a sale for my takeaway. The prior owner whom I bought it off gave me some vendor finance, but the sale now is nowhere near the amount that I paid. He is threatening me now to stop the sale. I have offered him weekly payments to pay it off, but he has declined this. Can you please tell me if he can do this?”
It raises the broader question of when – and if – any type of creditor has the right to impede the proposed sale of a business.
Can a creditor block the sale of a business?
Geoff Baldwin, special counsel at Stacks Champion, said that while it is difficult to provide exact responses to tricky legal scenarios without knowing the full details, there are a few points of which all business owners should be aware.
“Generally, a creditor has no legal right to block the sale of a business indebted to that creditor,” he told My Business.
“There are legislative mechanisms allowing the reversal of a sale of an asset undertaken ‘with the intention of defeating a creditor’ – popular example, the director of a company close to collapse selling his/her house to the spouse for $1 – but these only apply after the event, and wouldn’t allow some individual creditor to impede the sale.”
What if that person is not actually a creditor?
As Mr Baldwin noted, it is virtually unheard of for someone who is not actually a creditor to attempt to stop the sale of a business.
“I can’t think of how someone who is in effect simply a third party could block a sale,” he said.
“There would need to be some legal connection/relationship (such as holding security over an asset) between this person and the business owner.”
Administration and liquidation
The more prominent risk for business owners, Mr Baldwin said, was that a creditor could push for the business to be put into administration or liquidation.
“A business can put itself into administration or liquidation, or a creditor (if the business is run by a company) can trigger a process leading to this by serving a ‘creditor’s statutory demand’ on the defaulting debtor company,” he said.
“Once a company is placed into administration or liquidation … the owner/director cannot sell, because the law places that decision in the hands of the administrator/liquidator, who in turn is obliged to have regard to all creditors. Some individual creditor can’t just block the sale.”
According to Mr Baldwin, creditors are than categories as either secured – those with real property, assets or securities – and unsecured (i.e. those who are simply owed money). Unsecured creditors often include employees of the business, as well as the tax office.
“But [employees] have their unpaid accrued entitlements covered by the Commonwealth Fair Entitlements Guarantee scheme,” said Mr Baldwin.
“The ATO is an unsecured creditor, but legislatively is the 800-pound gorilla standing in front of everyone else in the queue. However none of this applies until a company is placed into administration or liquidation.”
Contract fine print
According to Mr Baldwin, a very rare – though not impossible – scenario is for a contract between two parties to restrict a business sale to themselves and not the open market, or for one person to be able to block the sale if there was a difference of opinion on disposing of the business.
“Outside of the above circumstances, a creditor cannot – at least through some legal process – bring the proposed sale of a business to a halt just because the business owes the creditor money,” he said.
“It’s different if the sale involves real property and the creditor has a mortgage or has lodged a caveat. Courts can make orders forbidding the sale of assets which are the subject of litigation. Once Family Court proceedings start, something which is an asset of the marriage can’t be sold, and it’s quite common for the Family Court to rule that some small business is an asset of the marriage.”
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