Question:
A broad outline of my situation is as follows:
1. I own 50% shares in a small Illinois S-Corp; the company is in good
standing with the secy of state.
2. On advice of my accountant, I have always kept an arms length dealing
with the company (separate bank account, no mingling of personal assets,
clearly stating company name in all communications etc).
3. In 2005 I signed a contract with a large publisher of periodicals
involving paying them $30,000 for advertising (I signed as president of the
company, no personal guarantees).
4. My company paid them $15,000 during 2006; it still owes $15,000 more to
them.
5. The company now has no revenues and has a miniscule balance in the bank.
The publication firm has assigned a collection agency. The collection agency
has threatened to sue me personally in New York to recover.
A bankruptcy attorney here dismissed me on the phone saying there's no need
to file for chapter 7 corporate bankruptcy, just don't file franchise taxes
with the state - and the corporation will die a natural death.
1. Can they sue me personally?
2. In the event I get sued, will it be easy to fight it? Also, Will I have
to travel to NY for court hearings etc.
Answer:
There are lots of things you must do to properly maintain the separateness
of the corporate entity. You mentioned three: (separate bank account, no
mingling of personal assets, clearly stating company name in all
communications). You didn't mention board meeting, shareholders meetings,
minutes, elections of officers. There may be more that I cannot think of at
the moment. There is no need to try to make the list complete here, because
you need to consult a local business transaction attorney on the matter, or
better still, a bankruptcy attorney. Not an accountant.
The big issue is that your company is insolvent. (miniscule assets and a
$15,000 debt) The bankruptcy attorney you consulted gave good advice to the
corporation, but not to you personally. If that advice was meant for you as
well as the corporation, it was bad advice. It is true that the state will
suspend the charter of the corporation if you don't file tax returns. But
that does not deal with outstanding debt. The suspended corporation can
still be sued, you will be sued as well, and your personal liability for the
debt remains the issue. So what would be the point of not filing the tax
returns and allowing the corporation to be suspended? Put that BK attorney
on you do-not-call-list.
Insolvency of the corporation can lead to personal liability unless you take
the corporation into bankruptcy. A bankruptcy decree will get rid of the
debt. If you don't take an insolvent corporation into bankruptcy, the
directors and probably the officers also, assume a fiduciary obligation to
the creditors. That's personal liability.
It is no defense that the company doesn't have any money to finance a
bankruptcy. There was a point in time when the company was insolvent and
yet still had a few thousand that could have been used for the bankruptcy.
Continuing to operate the company while it is insolvent is the key factor
the court could use to determine that the directors and officers have
breached their fiduciary obligation to the debtors. And going a step
further, I think, but can't prove at the moment, that majority shareholders
who are not directors or officers could also be held liable on the grounds
that not forcing management to take the insolvent company into bankruptcy
amounts to permitting an undercapitalized entity to do business and as a
sham corporation. That pierces the corporate veil.
Yes, the creditor can sue you in New York. Whether you can get the New York
case dismissed or transferred to Illinois depends on what the contract says
and on whether you or the company "do business" in New York or have other
"minimum contacts" with New York.
Finally, Ignore the collection agency. They make threats. Threats cost
nothing. If they sue, then you defend. Meanwhile, don't talk to them.
Talk to a BK attorney who knows something about personal liability for
corporate debts.
