Who Gets The Cash From The Liquidation Of Business Collateral?
It happens all the time, small business owners liquidate collateral and wonder who is entitled to the proceeds. The answer is simple – the bank.
The bank has a UCC security interest in specific equipment, inventory, receivables, trucks, etc. This attaches specific property to a specific loan and is a source of cash by liquidation for the holder of the UCC – the bank – should the loan default.
There is a different view taken if the transaction is in the normal due course of business and thus the small business owner can dispose of assets named on the UCC and use the cash in a reasonable manner so long as it is done in the normal due course of business. If so, there need not be permission granted from the bank to sell, nor must the proceeds be returned to the bank upon liquidation.
However, the proceeds from other machinery and assets – real estate, certainly – if sold, must be acceptable to the bank and given to the bank for them to release the UCC allowing the title to transfer. If the bank demands all or part of the proceeds it is in control and if they do not release the UCC the transfer cannot legally occur.
Under various circumstances, trading an existing piece of equipment for new equipment or selling surplus equipment and buying additional equipment will be permissible as the bank’s collateral position is not diminished by these actions. However, the rules change the moment you know you are liquidating the company and are no longer pursuing business as usual. At that moment the sale of inventory or the collection of receivables, as well as the sale of any equipment or trucks, must be deemed adequate in the evaluation of the bank and the proceeds must be turned over to the bank or the bank will not release the UCC and title cannot be transferred to the buyer which prevents a legal sale.
This rule is often broken and is not a good way to begin a wind down program with the bank. In addition, the seller and the buyer can be held responsible for the damages done to the bank including replacement value of the collateral sold.
Be careful when you have decided to stop your business and sell the assets. ALL the proceeds belong to the bank until they get paid in full. Lower priority secured parties, lien holders, and unsecured debt must not be paid in preference over the first secured party – the bank – until the first security holder is paid in full.
That is the way it is done, so pay attention and do it correctly. Always stay in communication with the bank or whomever holds the first secured security interest and work with them to come to a reasonable compromise when selling collateral assets.
