AN FRANCISCO, Sept. 3 — The chief executive of Napster said today that the company was headed for liquidation and later resigned and laid off his staff. The move appears to be the final chapter in the story of an Internet business that allowed millions of people to exchange music free online but was undone by lawsuits by the recording industry.

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The chief, Konrad Hilbers, made his comments after a bankruptcy judge ruled that Napster not be allowed to sell its assets to Bertelsmann, the German media giant. Napster, which had previously filed for bankruptcy protection, was looking to Bertelsmann as the probable, if not sole, candidate to revive it and restart it as a pay service that would reimburse recording companies when their songs were exchanged.

Judge Peter J. Walsh of the Federal Bankruptcy Court in Delaware ruled that Napster's proposed sale of its assets, including the brand name, was not made in good faith because Mr. Hilbers had "divided loyalty."

The judge said that the negotiations by the companies were tainted because Mr. Hilbers, a former Bertelsmann executive, had "one foot in the Napster camp and one foot in the Bertelsmann camp."

The ruling underscores the already complex relationship of Bertelsmann and Napster, based in Redwood City, Calif.

Mr. Hilbers, in an interview today, said, however, that he "disagrees with the judge totally" and that he was still trying to understand why the judge had deemed the situation to be a conflict of interest.

Whatever the reason, Mr. Hilbers said, the decision signals the probable end of the company, which was started by Shawn Fanning, a college student, and became the fastest-growing service on the Internet, with more than 80 million registered users at its peak.

The ruling means "liquidation for the entire company," Mr. Hilbers said, asserting it would soon modify its filing from Chapter 11, which enables a company to reorganize, to Chapter 7, which entails selling off assets. Tonight, Mr. Hilber laid off 42 people, including himself, because there was no money to pay salaries, Napster said, leaving only 2 staff members to oversee the bankruptcy.

In a brief statement, Bertelsmann said: "We accept the court's decision that the sale of Napster's assets to Bertelsmann has been denied and that the purchase will not proceed."

Napster has been off line since July 2001, after a federal judge — in a lawsuit brought by the recording companies — found that its service had abetted copyright infringement by allowing people to get songs free that they otherwise would have had to pay for. Since shutting down, Napster has sought to create a pay service that would charge consumers for access to music and reimburse artists. But, faced with numerous legal and technological hurdles, the company spent many of the ensuing months in financial intensive care.

It was unable to reach a final settlement with the recording companies, nor was it able to get licenses from them to sell their music legally to Napster users. Meanwhile, Napster, seeking to perfect underlying technology to both charge users and permit them to easily download music, had no income.

Hope for new life for Napster sprang from Bertelsmann, whose former chief executive, Thomas Middelhoff, championed the music-swapping service and its underlying concept, so-called peer-to-peer software. Under Mr. Middelhoff's guidance, Bertelsmann lent some $85 million to Napster to keep it alive and help it pursue its pay strategy.

With its financing running out, Napster announced in June that it would file for Chapter 11 bankruptcy protection and accept a $9 million buyout offer from Bertelsmann, pending approval of the sale by the bankruptcy court.

But further protests came from the recording companies, songwriters and music publishers. They are still seeking to be paid damages they say they are owed from the exchange of music on the free Napster service, and they estimate damage amounts could be billions of dollars.

Carey Ramos, a lawyer for the National Music Publishers' Association, argued that the sale was effectively an insider deal, consummated by two companies with strong ties and a chief executive, Mr. Hilbers, who had loyalty to both companies. Mr. Ramos said that, more fundamentally, the deal was constructed in a way that made Bertelsmann's bid artificially high and thus deterred other potential bidders from offering to buy Napster.

He also said that the music industry wanted more bidders because they might have driven the price up and created more money for damage claims.

Even had the deal gone through, it is unclear what would have happened. Bertelsmann, since Mr. Middlehoff's departure about a month ago, appears to have little will to pursue the Internet businesses it once embraced. Executives of Bertelsmann had said they might shut Napster if they bought it.

Whether Napster could ever thrive again, regardless of new owners, is another question. Some music industry analysts say the brand name, despite its once terrific draw, is of doubtful value. Since its demise, there has been a rise in other free music-swapping services, like Kazaa, that have captured Napster's audience, though they also face lawsuits from recording companies.