What if due diligence finds debts the seller swears are paid off?

When a registry search or a creditor’s letter shows a debt the seller says is settled, there are two possible explanations: it was not paid, or it was paid and the paperwork was never cleaned up. Both matter to a buyer, and the seller’s assurance cannot tell you which one you have. Evidence from the other side of the debt can.

Get the creditor’s version in writing

The creditor is the one party who can confirm a balance. Ask the seller to obtain a written statement from the secured party showing the amount owing, or confirming it was paid in full. Compare the creditor’s name and the collateral on the registration with what the seller describes. BC Registry Services offers searches for personal property liens, and other provinces run their own registries. A registration can also list collateral that is not actually subject to the lien, which is one of the reasons British Columbia lets entries be amended.

If it was paid, the registration should come off

A paid debt is not the same as a cleared registration. In British Columbia a secured party can file a financing change statement to discharge a registration, and under section 50 of the Personal Property Security Act a person can apply for a discharge where the amount secured has been paid. Ask for the discharge to be filed before closing, or made a condition of it, and have the search run again close to closing.

Debts that a property search may not show

Unpaid workers’ compensation premiums are one example. WorkSafeBC says that if a seller owes it premiums, the firm’s assets may be subject to a lien, and that a clearance letter protects a buyer against it. Alberta’s WCB says a buyer has a responsibility to get a clearance when buying a business, its stock or equipment, and that it has priority over the property and the proceeds of property used in the business if an employer has defaulted on premiums. Asking for a clearance letter is a quick way to test a claim that everything is paid.

What a mismatch tells you

A debt the seller called settled that turns out to be open is a finding, not yet a verdict. It changes your questions, starting with what else has been described as settled, and it goes to your lawyer and accountant to weigh against price, a payout from the closing proceeds, a holdback or the conditions. What a diligence finding actually does to a deal explains the options. Whether to continue is your decision.