Tag Archives: corporation

fraudulent conveyance oppression remedy

Can a corporation file bankruptcy and then continue business under a new corporation?

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.

 

limited liability company

Can a Limited Liability Company’s creditors go after the owner’s personal assets?

Question asked by James “Seamus” Lusk, on Quora: If a Limited Liability Company goes bankrupt, can the company’s creditors go after the owner’s personal assets?

Answer from Victor Fong, Licensed Insolvency Trustee in Toronto, Canada

Caveat: I practice in Canada and I am not a lawyer. You should contact an attorney and discuss with her the particulars of your situation.

With that being said, as you may be aware, LLC is an acronym for Limited Liability Company. So the entire purpose of operating under an LLC is to avoid personal liability for the company’s debts. So to answer your question, the general answer would be “no”.

However, there are three major exceptions:

  • If you gave any personal guarantees for the LLC’s debts (which most banks will insist on if the business loan is large), then you are personally on the hook.
  • If your personal conduct was determined by a court of law to be especially egregious resulting in losses for your creditors, the LLC may not protect you. The legal term for this concept is called “piercing the corporate veil”.
  • In Canada, if you are a director of the corporation, you are personally liable for obligations created by statute such as unremitted payroll deductions for income tax and government pension contributions, unpaid employee wages, and unremitted sales taxes. I’m assuming that there would be similar laws in the United States (which is where I assume you are located).

You also have to consider your own personal reputation. Do you plan to start a new company in the same industry? Because even if your corporation’s creditors cannot touch your personal assets, your reputation will be such that suppliers and financiers in your industry will no longer want to deal with you. You look at someone like Donald Trump who had multiple bankruptcies (through his corporations) and has accumulated a questionable reputation among lenders, tradespeople and suppliers in the real estate industry. Some food for thought.