Sham sale

A sham sale is a transaction in which a company sells assets to third parties controlled by the shareholders at prices well below the market values of the assets. Once these assets have been stripped away from the company, the entity enters bankruptcy, leaving little of value for creditors to recover. There are several ways for creditors to combat sham sales. They can force the company to agree to a loan covenant, so that it cannot engage in the sale of assets without the permission of the lender. Another option is to require personal repayment guarantees by the owners of the business, while a third option is to take a security interest in the company's assets and perfect the lien. The lien attaches to the assets even if they are sold to a third party, so the assets can still be seized even after a sham sale.

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