When someone sells a company, the status of its creditors becomes an issue. Creditors hold an interest in the outcome of the sale, as it impacts their ability to collect debts. Understanding how the court handles these debts depends on the structure of the sale and the agreements reached during the transaction.
Asset sale vs. stock sale
The impact on creditors depends on whether the sale is as an asset or stock sale. In an asset sale, the buyer acquires company assets. The original company retains its liabilities, including debts to creditors. The selling company remains responsible for settling these debts. In a stock sale, the buyer acquires the company, including its liabilities. Creditors retain their claims against the company, and the buyer assumes responsibility for fulfilling those obligations.
Ohio’s approach to creditor rights
When a business sells, Ohio law protects creditors. Under Ohio’s Bulk Transfer Act, if a company sells most or all of its assets outside the usual course of business, the buyer must notify creditors before completing the sale. This notification allows creditors to assert their claims. Failure to comply with this requirement can void the sale or lead to legal action against the parties involved.
Additionally, under Ohio Revised Code Section 5739.14, a buyer may be responsible for sales taxes owed by the seller, emphasizing the importance of due diligence during the sale process.
Secured vs. unsecured creditors
The treatment of creditors varies based on whether they fall under the secured or unsecured category. Secured creditors often claim assets. This gives them priority in the distribution of sale proceeds. They are more likely to recover their debts. Secured creditors receive payment before unsecured creditors, reducing the chances that unsecured creditors will recover their debts.
Handling creditor claims
Several factors influence the outcome for creditors in a company sale. Addressing creditor claims ensures a smooth transition and minimizes legal disputes following the sale.