Are creditors able to block the sale of a small business?
Sometimes we are contacted by small business owners who are concerned that a proposed sale of their business could be blocked by a creditor. Such scenarios may include, for example, prior owners of the business who provided vendor finance to the new owner, or family members who provided finance in the business set-up, being upset about the proposed sale price, or wanting to stop the sale for other personal or business reasons.
Although the legal implications may vary depending on the particular scenario, there are a few points all business owners should be aware of.
Ultimately, generally speaking a creditor has no legal right to block the sale of a business which is indebted to that creditor, at least, just because of being a creditor.
While there are legislative mechanisms allowing the reversal of a sale of an asset undertaken “with the intention of defeating a creditor”, these only apply after the event, and would not usually enable a creditor to impede the sale. An example of this could be the director of a company which is close to collapse selling his or her house to their spouse for $1.
Are there situations where the sale of business could be blocked by someone who is not actually a creditor?
It is rare for a third party, or someone who is not actually a creditor, to attempt to block the sale of a business. Essentially there needs to be some legal relationship or connection between the business owner and the person attempting to impede the sale. For example, the person holds security over an asset.
What legal paths could a creditor pursue to block the sale of a business?
The more prominent risk for a business owner is that a creditor can push for the business to be put into administration or liquidation.
While a business can put itself into administration or liquidation, a creditor – if the business is run by a company – can also trigger the process leading to this by serving a “creditor’s statutory demand” on the defaulting debtor company.
The owner or director is unable to sell their business once a company is placed into administration or liquidation, because the law places that decision in the hands of the administrator or liquidator, who in turn is obliged to have regard to all creditors.
Secured and unsecured creditors
Creditors are classed as either secured – those with real property, assets or securities – or unsecured – those who are simply owed money. Unsecured creditors may include the tax office and employees of the business.
While the ATO is, through legislation, generally first in the line of creditors, employees are somewhat protected, having their unpaid accrued entitlements covered by the Commonwealth Fair Entitlements Guarantee scheme.
Importantly however, none of this applies until a company is placed into administration or liquidation.
Can a contract hinder a sale of a business?
Rarely, although it is possible, a contract formed between two parties can restrict a business sale to have to occur between themselves, and not the open market, or enable one party to block the sale should there be a difference of opinion in disposing of the business or the sale price.
Therefore, although a creditor cannot – at least through some legal process – halt the proposed sale of a business just because they are owed money, it is a different story if the sale involves real property and the creditor has a mortgage or has lodged a caveat.
In such situations, courts can make orders forbidding the sale of assets which are the subject of litigation. As an example, once Family Court proceedings start, something which is an asset of the marriage cannot be sold. It is quite common for the Family Court to rule that a small family-owned business is an asset of the marriage.
If you have a small business and are concerned that the sale of your business may be hindered by a creditor, you should seek legal assistance as soon as possible to discuss your options.