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A business lien is a creditor’s security interest in a business due to unpaid debts, allowing them to place a lien on company assets. There are two types of corporate liens: judicial and consensual. It is important to research liens before buying a business to avoid legal battles and asset loss.
A business lien is a security interest that creditors have in a business due to unpaid debts. The creditor can place a lien on the company assets, preventing them from being sold without receiving payment of the outstanding balance on the debt. Secured interest is where creditors file a claim on assets. A business lien is a secured interest and not an unsecured interest where the claim is against the owner of the business at large. Two main types of corporate liens are a judicial lien and a consensual lien.
When a court ruling results in a lien on company assets, a judicial lien is created. The court case must not be business related for the plaintiff to attach business assets. For example, if a plaintiff slips and falls at a contractor’s home and the homeowner’s insurance policy isn’t sufficient to pay all of the medical bills, a judge may grant the plaintiff a judicial lien to cover the difference if he wins the case. The defendant can pay the damages, but if he is unable, the plaintiff can execute the judgment and obtain possession of the property.
A consensual trading lien is one where the business owner consents to the lien. A common example is when the business owner takes a loan, as in a bill of exchange, and gives the lender a security interest in the business assets. The business owner has the right to use and own the assets, but cannot sell or transfer the assets due to creditor interest. If the contract holder defaults on the loan, the lender can use the legal system to take possession of the assets secured by the loan. Certain types of assets may be protected under local laws, such as a home that is also used for a business.
One of the disadvantages of buying a company with liens is that it becomes a historical part of the company background. It can affect the ability of those who want to buy the company to obtain financing from investors and partners. In negotiating the purchase of the business, it is important that the purchase agreement contains language that guarantees that the business is free and clear of any commercial liens. It is also incumbent on the individual buying a business to conduct their own research where the public records of liens filed by creditors are kept. Failure to do so often leads to costly legal battles to void the purchase agreement or receive money for bond damages.
In many jurisdictions, creditors often have the right to seize assets and sell them after following appropriate legal proceedings. People who want to buy a business often research trading liens before investing in it. They risk losing some or all of company assets if they buy an asset that has a lien attached to it if they don’t.
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