You Can’t Just Go Out Of Business And Start Another Company To Avoid Paying Damages

Andrew Richards
Co-Managing Partner(LI),
Kaufman Dolowich Voluck,
Attorneys at Law
Legal Counsel, STA

There are many contractors who have been in business for many years fortunate enough to avoid litigation.  However, at some point, if you work on enough projects, litigation is unavoidable.  I have fielded many calls from contractors who seek legal advice concerning a construction dispute who I unfortunately have to advise that they face liability and damages.  The prospective client then informs me that the company does not have the ability to pay and that they were advised by others just to close shop and open up a new company because the owners are shielded from personal liability because the company is a corporation or a limited liability company.  Not so fast!

There are statutes in the New York State Debtor and Creditor Law that provide for personal liability for corporate debts in some circumstances.  The Uniform Voidable Transactions Act provides that a transfer is voidable if a debtor (i) transfers assets with the intent of hindering, delaying or defrauding any creditor, or (ii) does not receive a reasonably equivalent value in exchange for the transfer and the debtor (a) was or was about to engage in a transaction which would leave the remaining assets unreasonably small in relation to the business or (b) intended to incur or should have known that the debtor would incur debts beyond the debtor’s ability to pay as they became due.

In determining a debtor’s actual intent to hinder, a court may take into account, among other things whether: the transfer was made to an insider; the debtor retained possession of the asset; the debtor was sued or was threatened with a suit before the transfer was made; the debtor became insolvent after the transfer was made; or the consideration received by the debtor was unreasonably equivalent to the value of the asset transferred.  Changing the deed of your house to your mother, moving assets from the debtor to a new company, taking money out of the company even if it was for repayment of a loan when you have been sued will not help you avoid paying a debt.

There are a lot of facets to the Act, and you can’t just assume closing down a business and opening up another one will allow you to avoid paying damages.