When winding up a company “The Right Way” is valuable.

Facts: Company A sells all its assets (but not its stock) to Company B.  Some of B’s owners were also owners of A.  A is then formally dissolved according to your state’s requirements while B continues operations.  Is Company B liable for Company A’s debts?

IF your state’s law provides for notice to creditors upon dissolution and some provision for Creditors to place claims, and IF A gave notice to all its creditors that it was dissolving so that the creditors could file timely claims, any CREDITORS who did not timely file a claim lose.  That’s the point behind most corporate dissolution statutes; to provide for orderly dissolution and payment of creditors claims timely filed and cutting off claims that aren’t.  But if A did NOT do it properly and follow all procedures, then the owners of A and possibly Company B may still owe money.

Are there exceptions to this rule?  Yep.  This is the law and there are always exceptions.  Generally there are 4 exceptions (the details are state specific so I can’t go too far into them in this general post):

(1) where the purchaser expressly or impliedly agrees to assume such debts;

(2) where the transaction is really a consolidation or a merger;

(3) when the purchasing corporation is merely a continuation of the selling corporation;  and

(4) where the transaction was fraudulently made in order to escape liability for such debts.

To determine if there is a merger usually courts will examine:

(1) whether there is a continuation of the enterprise (each state is different),

(2) whether there is a continuity of shareholders (ditto),

(3) whether the seller corporation ceased its ordinary business operations, and

(4) whether the purchasing corporation assumed the seller’s obligations (impliedly as well as explicitly).

To determine if Company B is merely a continuation of A, you must check to see if only 1 corporation remains and if the stock, stock holders and directors are the same (or substantially the same).

BUT, as I said above, the devil is in the details.  While the standards are pretty much the same for all states, the way the courts examine the facts vary quite a bit.  In case of doubt (and I assure you that there will be doubt or should be) talk to a lawyer and learn how to do it right.  Because if you don’t you will be calling me asking for help when Company A’s creditors come after you.

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