Corporate Lien: Definition & Meaning

KEY TAKEAWAYS

• Corporate liens are legal claims that are put against a business.
• These claims are backed by a court order and filed against a business’s assets.
• A corporate lien prevents the business selling assets that are attached to the order. This is until the money has been fully repaid.

What Is a Corporate Lien?

A corporate lien is a legal claim against a business. It is posed for the purpose of regaining money that is owed to another entity. A corporate lien is most commonly placed on a business for unpaid bills or for a debt that is owed to another business. Corporate liens can also be used to recover back taxes that are owed to the government. 

It is placed on the debtor company’s assets to record that the company has a single, or a number of outstanding financial obligations. When a business has had a corporate lien claimed against them, this is considered important information for potential buyers and shareholders to know. 

How Does a Corporate Lien Work?

Corporate liens are a type of lien that is used against an organization instead of an individual. Placing a corporate lien against a business requires a court order. This order must agree that the company in question is in debt for money that is owed to another entity. 

Once a court order has been put in place that agrees that money is indeed owed, that claim can be filed and attached to the registered assets of the business in question. When a corporate lien is filed, the assets that are subject to the lien can’t be sold freely. This is technically known as no longer being unencumbered. 

There are certain instances when more than a single outstanding lien can be in place against a business. If the business goes under, the order of the lien holders matters in terms of who it is that will be paid back. 

The more liens there are on a business, the more risk there is for future lenders. Lenders are far less likely to take on any amount of risk with second and third lien positions as a result of this increased risk. 

What Is the Difference Between Corporate Liens and Personal Liens?

Corporate liens work in the same manner as a personal lien. So for example, let’s say that a bank finances a personal automobile loan. The bank will hold a lien on the vehicle to secure the loan should it not be fully paid back. This is essentially putting up collateral to guarantee the loan. 

In the event that the loan isn’t fully paid off, the credit can take possession of that asset. 

Personal and corporate loans differ in the fact that a corporate lien can become a form of investment. If a company fails to meet its obligations, investors can purchase the corporate lien and settle the debt with the lender. 

An example of this is commonly seen in the area of unpaid back taxes. This is where a company suddenly has to pay large amounts in back taxes, plus any further penalties. In cases such as these, investors may step in and negotiate new lending terms to prevent bankruptcy. Should the company then end up having to declare bankruptcy, holders of the corporate lien will most likely be given priority over others waiting in line to be repaid. This includes stockholders.

How Do I Remove a Lien From My Business?

A lien should be removed as quickly as possible for a number of reasons, in addition to the obvious necessity to pay off debt and prevent having your business property seized. 

Some lenders won’t work with a company even if it has a mutually agreed-upon lien. Occasionally, if they can secure first lien position, they will. Position refers to the fact that liens are paid in the chronological order in which they were filed. Lenders who hold first position will be compensated first. 

Tax liens may also have an impact on your company’s credit rating. Of course, you cannot sell any property that is subject to a lien.

To remove a lien from your business, you can do the following:

Call whoever filed the lien to gather more information. If you feel it is unlawful, you can ask them to correct it and offer evidence. If necessary, you can take them to court to remove the lien. But obviously, the most simple way to remove a lien from your business is to pay it off in full. 

What Is an Example of a Lien?

Let’s say that Investor X wants to purchase some business property. In order to make the transaction, they borrow $150,000 from the bank. The bank wants to guarantee the loan repayment, so it asks Investor X to provide further assets as collateral for the loan. 

The bank will then file the necessary legal documents with the government agency that is required to register the lien. When the process is complete, the bank will become the holder of the collateral. 

If Investor X is unable to meet their financial obligations according to the agreement, the bank will take possession of the collateral assets. The bank can then sell these assets to gain back the money that they loaned out. 

Summary

Corporate liens are legal claims against a business. They prevent the sale of any assets that are attached to the lien. This is until the money has been paid. 

If an investor is considering buying into a business, they need to make sure due diligence is properly performed. This is to assure that there are no outstanding corporate liens held against the company. There are a number of databases that are publicly available for potential buyers looking to find any outstanding liens.

It is also possible to hire someone that is familiar with lien searches. This can help to avoid and post-sale realizations and avoid any expensive post-sale legal action.