The Bulk Sales Law does not apply to all bulk sales POINT OF LAW By POINT OF LAW Rolando

F. Del Castillo | Updated April 26, 2005 - 12:00am Whenever one sells all or substantially all of his assets, both the lawyer of the buyer and of the seller often require the seller to comply with the requirements of the Bulk Sales Law (the Law) before the sale actually takes place. The Law requires certain inconvenient formalities to be complied with before a sale of transfer in bulk of items specified in the Law may take place, other than in the ordinary course of business. Under the Law, if the seller is unable to obtain a written waiver from all his creditors of the provisions of the Law, the sale will be void as against the seller’s creditors, unless the seller delivers to the purchaser a list of his creditors with the amount owing to each, conducts an inventory of the assets and gives prior notice of at least 10 days to his creditors of the proposed sale and the terms of the proposed sale. However, in most cases, the sale of all or substantially all of one’s assets is not covered by the Law, for the Law covers only the bulk sales contemplated in Section 2. What is a Bulk Sales? Under Section 2, a sale or transfer is in bulk if it involves any sale, transfer, mortgage or assignment of "(a) 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 (b) all or substantially all of the business or trade theretofore conducted by the vendor, mortgagor, transferor, or assignor, or (c) all or substantially all of the fixtures and equipment used in or about the business of the vendor, mortgagor, transferor or assignor." The common meaning of the term "stocks in trade" when applied to goods in a mercantile house refers to those which are kept for sale. The term "merchandise", when used in bulk sales laws, means such things as are usually bought and sold by merchants. Upon the other hand, when used in bulk sales laws, the term "fixtures" refer to such articles of merchandise usually possessed and affixed to the premises occupied by them to enable them to better store, handle and display their wares and which are commonly known as trade fixtures, although they can be removed without material injury to the premises before or at the end of tenancy (1 Martin, Philippine Commercial Laws [1988] 509-510; 2 Agbayani, Commentaries and Jurisprudence on the Philippine Commercial Laws ([1992] 775-776). Law Applies to Merchants. Bulk sales laws generally apply to retail merchants, traders and dealers and generally only to persons of that class (1 Martin, op. cit. 509). On the basis of Section 2, the Bulk Sales Law does not apply to a bulk sale by a manufacturer because of the nature of the latter’s business, i.e., it is not engaged in the business of selling stocks in trade (2 Agbayani, op. cit. 776). The sale of an entire automobile repair shop, together with its goodwill, credit, machineries, tools and because this would involve the sale of a business engaged in rendering services and not the sale of goods (Gopengco, Compendium of Commercial Law [1983] 598). In addition, the sale of a barber shop would not be covered by the Law, since no stocks in trade are really involved in the operation of a barber shop (Vitug, Pandect of Commercial Law and Jurisprudence [1997] 803. Applicable Jurisprudence. In People vs. Wong Szu Tung, CA-G.R. No. 9776-R, March 26, 1954, 50 0.G. 4867, the Court of Appeals held that the sale of a foundry shop was not covered by the Bulk Sales Law, where what was sold was the shop itself, together with the goodwill and credits, equipment, tools and machinery, including a Dodge truck, because this did not constitute a sale of a stock of merchandise, goods, wares, provisions or materials in bulk. I have been unable to find any jurisprudence to the contrary. In People vs. Wong Szu Tung, the Court of Appeals also reaffirmed the rule of statutory construction that should be applied in construing the Bulk Sales Law. Because the law is penal in nature, the Court declared that it must be strictly construed against the State and liberally in favor of the

accused. The law should not be extended by construction to situations not clearly intended thereby (1 Martin, op. cit. 507). In the words of retired Supreme Court Justice Jose Vitug: "The essential provisions of the law, i.e., Section 3 to 7, inclusive, specifically and repeatedly mention ‘stock of goods, wares, merchandise, provisions or materials in bulk’ in their application, a situation which conveys that the legislative intent is merely to govern the bulk sales of stocks in trade, and/or fixtures and equipment used in that business, by the vendor, transferor, mortgagor or assignor (Vitug, op. cit. 803)." Bulk Sales Law Applies specifically to merchants who obtain their stocks or merchandise on consignment and may unscrupulously decide to sell the bulk of their stock and thereafter disappearing, without remitting shares of the suppliers who are left with no remedy at all Purposes 1. To prevent the defrauding of creditors by the secret sale or disposal or mortgage in bulk of all or substantially all the merchants stock of goods 2. To prevent secret or fraudulent sale or mortgage of goods in bulk until the creditor of the seller shall have been paid in full Constitutional as being a valid exercise of police power Penal in nature. Thus, its provisions must strictly construed against the government and liberally in favor of the accused

Business covered The terms goods and merchandise as used in the BSL have acquired a fixed meaning. Goods - refer to things and articles which are kept for sale by a merchant Merchandise - such things as are usually bought and sold by merchants Fixtures - refer to such articles of merchandise usually possessed and affixed by the merchants to the premises which are occupied by them in order to enable the latter to better store, handle and display their goods and wares. They are commonly known as trade fixtures, although they can be removed without material injury to the premises before or at the end of tenancy. These technical terms convey the intention that the BSL applied to merchants which are in the business of selling goods and wares and similar merchandise, hence, the said law was held not to apply to a sale of assets by a manufacturer since the nature of his business does not partake of merchandising. BSL must be construed strictly. Thus, the disposal by the owner of a foundry shop of all his iron bars and other items does not fall under the provisions of the law, because the contents of a foundry shop are not wares and merchandise. A foundry shop manufactures iron works or processes or casts metals. It does not sell merchandise. BSL only covers sales in bulk of fixtures and equipment used in the mercantile business, which involves the buying and selling of merchandise. (People vs. Wong Szu Tung, CA-G.R. No. 9776-R, March 26, 1954, 50 0.G. 4867) Bulk sales laws generally apply to retail merchants, traders and dealers and generally only to persons of that class. On the basis of Section 2, the Bulk Sales Law does not apply to a bulk sale by a manufacturer because of the nature of the latters business, i.e., it is not engaged in the business of selling stocks in

trade. The sale of an entire automobile repair shop, together with its goodwill, credit, machineries, tools and because this would involve the sale of a business engaged in rendering services and not the sale of goods. In addition, the sale of a barber shop would not be covered by the Law, since no stocks in trade are really involved in the operation of a barber shop. Transactions covered - Any sale, transfer, mortgage, or assignment of: (STMA) 1. a stock of goods, wares, merchandise, provisions, or materials other than in the ordinary course of trade or business 2. all, or substantially all, of the business or trade 3. all, or substantially all, of fixtures and equipment used in and about the business of the seller, transferor, mortgagor or assignor Exempt transactions 1. STMA in the ordinary course of trade or business 2. When there is a written waiver from all the stmas creditors 3. Sale by virtue of a judicial order (JUDICIAL SALE) 4. Sale by the assignee or those beyond the right of creditors 5. Sale of properties exempt from attachment or execution BSL has NO applicability to a sale by executor, administrator, receiver, assignee in insolvency, or public officers, acting under process

Obligations of persons selling in bulk 1. Deliver to buyer or mortgagee a sworn written statement of the names and addresses of creditors as well as the respective amounts of debts 2. Apply the proceeds to the pro-rata payment of the bona fide claims of the creditors as shown in the verified statement 3. At least 10 days before the sale, transfer, mortgage or assignment, make a full detailed inventory of stock of goods, wares, merchandise, provisions or materials in bulk and to preserve the same 4. Notify the creditors at least 10 days before transferring possession of the stock of goods of the price, terms and conditions of the sale, transfer, mortgage or assignment 5. Register the sworn written statement/list of creditors with DTI The STMA shall be FRAUDULENT AND VOID if 1. Sworn listing of creditors is not prepared and delivered, and/or 2. Proceeds of transactions is not applied pro-rata to listed creditors 3. Incomplete, false or untrue sworn written statement This injunction is not merely a presumption. Therefore, whatever may be the parties motivation in the transaction, and whether they have acted in good faith or bad faith, the transaction is nevertheless treated as fraudulent and void. No legal consequences would therefore flow from the transaction, including non-transfer of ownership over the subject matter thereof, and no right of action would accrue from the transaction. Consequently, subject matter remains to be owned by the seller or assignor, and subject to satisfaction of his liabilities, and buyer or assignee has no legal basis to stake a claim on said property, even if he has acted in good faith.

Effect of the submission of false sworn statement/list of creditors: Would constitute a violation of Section 4 of the BSL which requires seller to deliver to buyer a sworn written statement of the names and addresses of all creditors to whom he may be indebted together with the amount of indebtedness due or owing, or to become due or owing. In such a case, the sale shall be deemed fraudulent and void. The good faith of the buyer is immaterial. The creditors of the seller may recover the stocks of goods and merchandise acquired by the buyer from the seller. Effect of sale in violation of Bulk Sales Law: VALID if there are no creditors involved VALID between the parties, VOID as to affected creditors 1. Sale in bulk is void 2. Purchaser holds the property in trust for seller (whether in good faith or bad faith) 3. Purchaser is liable to sellers creditors for properties forming part of bulk and already possessed by him Obligation of the buyer: BSL imposes no direct obligation on buyer, transferee, mortgage, or assignee in bulk sales. Strictly speaking, therefore, since criminal provisions are to be construed strictly in favor of the accused, a buyer in a bulk sale cannot be deemed to be subject to criminal liability under the BSL. However, a buyer may be held liable as a principal by indispensable cooperation, if he was aware of intent of the seller or conspired with the seller. Offenses punishable under the Bulk Sales Law: Those which involve violations of Sections: 3 Delivery of sworn written statement/list of creditors 4 Pro-rata application of proceeds 5 Written advance disclosure to creditors 6 Incomplete, false or untrue sworn written statement 7 Bulk transfers for nominal value 9 Registration with DTI All of which makes reference only to the first type of sales in bulk (STMA a stock of goods, wares, merchandise, provisions, or materials other than in the ordinary course of trade or business). The absence of any reference in these sections to the two other types of sales in bulk could only mean that they are not intended to be covered by these provisions. Considering their penal character, these provisions must be interpreted strictly against the state such that non-compliance with them, in a situation where the sales in bulk involved is not of the first type, would not be punishable. Penalty for violation of BSL: Any person violating any BSL provision, shall, upon conviction thereof, be punished by imprisonment for not less than 6 months, nor more than 5 years, or fine in any sum not exceeding P5,000.00, or both such imprisonment and fine, in courts discretion. Fraudulent conveyance under the BSL vs. transfer in fraud of creditors under the Civil Code A conveyance or transfer fraudulently made in violation of BSL is null and void; while a conveyance or transfer in fraud of creditors under the Civil Code is rescissible and is valid until set aside by a competent court.

When the law is duly complied with, the creditors may not object to the transaction, but it may be rescinded if it is shown that it was, in fact, made in fraud of creditors Creditors contemplated: Creditors at the time of the STMA. BLS protects only creditors at the time of transfer, not future ones. They need not be judgment creditors Sale of 100% stock not a sale in bulk Transaction is sale of stocks not of the business which would result to detriment of creditors. Business still continues and the creditors may proceed against the same corporation which owed them. There is merely change of ownership in business. Merger not a sale or transfer in bulk Even if the merger were considered a sale or transfer of all or substantially all the business or trade of the corporation (type 2), the requirement of notice to creditors under Section 5 of the BSL applies only to a sale or transfer or a stock of goods, wares, merchandise, provisions, or materials (type 1). Being penal in character, the BSL would have to be interpreted strictly against the State. Sell of all the goods in the gift shop While it is true that Maya is in the business of selling goods and that her sale in one transaction of all her stock of goods could, conceivably, be considered in pursuit of her business, the fact, however, is that she sold all her stock of goods to get out of, not to continue with, her business. Such sale cannot be considered in the ordinary course of trade or the regular prosecution of her business and must, therefore, be subject to the requirements of BSL. Seller Right: Recovery of the property sold or mortgaged Obligation: Return to the buyer/mortgagee the price delivered Criminal liability Buyer/Mortgagee Rights: 1. Recovery of the price delivered plus damages 2. No right in the property as against the seller/mortgagors creditors Obligation: Hold in property in trust for the seller/mortgagors creditors (good faith or bad faith is immaterial) Liabilities: 1. Liability to the seller/mortgagors creditors for the properties received in trust but which he may have disposed 2. Possible criminal liability. May be held liable as a principal by indispensable cooperation, if he was aware of intent of the seller or conspired with the seller 1. File a complaint against the seller/mortgagor for violation of BSL 2. Collect credit against the debtor-defendant and to attach the property fraudulently sold/mortgaged since the same still pertains to the debtor-defendant