Continuing Liability for Unpaid Corporate Debts After a Corporation Ceases Business
| Publication year | 1985 |
| Pages | 40 |
| Citation | Vol. 14 No. 1 Pg. 40 |
1985, January, Pg. 40. Continuing Liability for Unpaid Corporate Debts After a Corporation Ceases Business
After a corporation dissolves or ceases to do business, individual liability for unpaid corporate debts may attach to the officers and directors of the corporation. Such liability may stem from the improper transfer of remaining corporate assets or the past misrepresentations of corporate agents regarding the corporation's ability to pay for goods or services ordered on credit. Similarly, when the principal employees of a dissolved corporation later conduct the same business enterprise under a different name, the new entity may be held liable for the unpaid debts of the now dissolved corporation.
This article discusses how and when personal liability may attach to individuals for unpaid corporate debts under Colorado law when the corporation ceases doing business, without using the protection of the Bankruptcy Court.
Many smaller corporations which fail often simply cease doing business without seeking the protection of the bankruptcy laws. When this occurs, a corporate officer or director, and sometimes a shareholder of the failed company, may be held liable for unpaid corporate debts. This results if it is determined that these individuals failed to comply with statutes governing corporate dissolution(fn1) or transfer of corporate assets,(fn2) or if they committed fraud when acting as corporate employees.(fn3)
In the case of B & K Distributing v. Drake Building Corp.,(fn4) an officer and director who was not a shareholder of the dissolved corporation was held liable for the corporate debts of the dissolved corporation. This individual, Drake, had transferred all corporate assets to himself while the dissolved corporation was insolvent and claimed the transfer of property was for unpaid wages. Shortly afterward, Drake incorporated a new corporation which acquired the tools and contracts of the old corporation (under slightly different terms). The trial court found Drake to have concealed facts fraudulently prior to dissolving the first corporation and to have fraudulently misrepresented the dissolved corporation's ability to perform its contracts with the plaintiff.
The Colorado Court of Appeals held that Drake was liable for his breach of duty to corporate creditors. This duty called for him not to divest corporate property for his own benefit, thereby defeating the claims of other corporate creditors.(fn5) The extent of this liability was for all of plaintiffs claims against the old corporation. Drake's new corporation was also held liable for the debts of the defunct corporation, because it was a "mere continuation" of the dissolved corporation,(fn6) even though the new corporation was funded with $2,000 in new capital invested by Drake.
The corporate officers and directors of an insolvent corporation that goes out of business are trustees of the corporate assets for the benefit of corporate creditors.(fn7) In Rosebud Corp. v. Boggio,(fn8) the Colorado Court of Appeals held that a director of a defunct corporation was to be...
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