DEFINITION of Bulk Sales Escrow
Bulk sales escrow is an escrow arrangement enacted when a company is losing money. It is aimed at protecting unsecured creditors. The escrow agent collects money from the sale of inventory or business assets and places them in an account. The business and seller of the assets is not allowed to access the funds and they must be paid to the creditors. The escrow serves to protect the interests of unsecured creditors. The agreement eliminates the risk that the seller of the assets will use the proceeds from the sale for purposes other than paying debts or taxes owed.
BREAKING DOWN Bulk Sales Escrow
Bulk sales escrow is a procedure utilized when a company is experiencing financial difficulty. The company can ease its problems by downsizing its business and selling off portions of its inventory or business assets. To ensure the proceeds from these liquidations aren't lost in further unprofitable business operations, an escrow agent receives the funds from the seller, holds them until the transfer of the assets and then forwards the funds to the appropriate parties. Escrow fees are charged for this service and are usually shared by the buyer and the seller, but the escrow agreement can specify any fee payment arrangement agreed to by the parties.
Example of Bulk Sales Escrow
For example, XYZ Corporation has seen its top line revenue shrink significantly over the last several years as it sells an obsolete widget. To compensate for the loss in revenue, XYZ Corporation has been borrowing large amounts of money. So much so that the company is now insolvent in the sense that its liability balances are more than its assets. XYZ Corporation's unsecured creditors enact a bulk sales escrow agreement with XYZ Corporation to protect themselves by ensuring that the money received by XYZ Corporation from the sales of certain assets is given to the creditors.