Question asked on Quora: Can a corporation file for bankruptcy to avoid a lawsuit and the same owners then open same business under a new corp?
The representatives of the corporation claimed multiple times to be able to fund the business. Those same representatives are both chair and CEO of other corporations and do not fear credit loss from being sued.
If they can, is their new corporation liable?
Answer from Victor Fong, Licensed Insolvency Trustee, Toronto, Canada
Caveat: I am not a lawyer and I practice in Canada. The following reply is based on Canadian law. You should arrange for a consultation with a lawyer in your jurisdiction to get a clear answer.
Assuming the old corporation had assets of value (e.g., plant and equipment, accounts receivable, real estate, etc.), if the representatives moved assets from the old corporation to the new corporation when the old corporation had unpaid debts, this would be considered a “fraudulent conveyance”. The creditors of the old corporation can take legal action to have this transfer set aside by a court and bring the assets back to the old corporation for the purpose of being liquidated (say by a bankruptcy trustee or receiver retained by the creditors) with the proceeds distributed to the old corporation’s creditors.
If the old corporation had no assets of value and was essentially operating as a shell company, then legally, the representatives can do what you described because there were no assets to transfer in the first place.
Now, from the standpoint of a shareholder (as opposed to a creditor as described above), there is a concept in Commonwealth countries (such as Canada) called an “oppression remedy”. If you were a shareholder of the old corporation and the company representatives transferred assets to the new corporation and carried on business, you can seek a remedy from the Court to have this transfer set aside. But as above, if the old corporation had no assets and nothing was transferred to the new corporation, then I don’t think there’s much you can do.