More on winding up a business

Posted by Dave Broadwin on November 18, 2009

Unfortunately, winding up investments that did not work out, is a task that will be with us for some time.  I have written a number of posts on the liabilities of officers and directors.  One more  item that needs to be considered in this context is obligations subject to foreign law.  For example, the UK has labor laws under which the directors of a corporation may have personal liability for severance obligations owed to the employees of a UK sub.  Agreements with foreign distrubutors can also pose special problems.  To make matters worse, your US attorney is not likely to be expert in these laws.  So, at a time when money is tight and tensions are high, you may find that you have to retain lawyers or accountants in foreign jurisdictions. 

Salary deferrals have bad consequences

Posted by Dave Broadwin on April 24, 2009

We recently sent out a client alert on a recent court decision in a case involving salary deferral. The gist of the case was that two founders of a new company agreed to a salary deferral until the company could afford to pay them. This agreement was, apparently, set forth in a written agreement. The two founders came to a parting of the ways, and one of them, the CEO, later sued both the company and the cofounder for back pay under the Massachusetts Payment of Wages Statute. This may sound bizarre, but even though there was a written agreement to defer salary and even though the plaintiff was the CEO and a co-founder, the court found that the contract was void under the statute and found that both the company and the cofounder were liable for unpaid wages. One way out of this box is noted in our client alert: pay the minimum wage and make anything in excess a bonus contingent on the company’s financial condition.

This decision should be a lesson for companies trying to conserve cash. Seek advice before just deferring salary.

What happens to a noncompete when the company shuts its doors?

Posted by Dave Broadwin on April 15, 2009

So here is a question that does not often arise: If a company shuts its doors and just ceases doing business what happens to the employee obligations not to compete? The short answer is that if a company just shuts down and stops doing business without a successor (and that is the key), then it is not in a business against which one can compete so in all probability you can go forth and don’t worry. But, that almost never happens even when it happens. Think about the following:

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When to shut down personal liability

Posted by Dave Broadwin on March 09, 2009

Approximately a week ago, Simeon Simeonov posted a piece on the subject of when to throw in the towel.  This was in response to another post by Jason Calcanis that seemed to be arguing for fighting on against all odds.  My personal sense is that each situation is different and has to be evaluated on its own merits.  All that being said, I am guessing that there are a lot of conversations in a lot of board meetings about whether or not to shut down and that there will be many many more in the coming months. 

At the risk of interjecting lawyerly details into a passionate conversation, when you are in the zone of contemplating a shut down, you are also in the zone of having to think about personal liability.  There are some legal things to keep an eye on.  I have written on this subject before and thought  that maybe it would be a good idea to make it easy to find these posts.  Here they are:

The lawyerly disclaimer is that each situation is unique, and you need specific advice if you find in this kind of situation.

Here's hoping you don't.

When You Find Yourself in a Workout Situation

Posted by Dave Broadwin on December 01, 2008

I spoke with Peter Alcock, a long standing client and friend, the other day about the issue that keeps coming up with respect to personal liability, personal guarantees and the like. Peter is particularly well situated to address these issues because in past lives he has had to deal with these issues both as a consultant and as an entrepreneur. Fortunately, in his current life as CEO and owner of Beckwood Services, he doesn’t have to worry about these types of issues. Anyway, I asked Peter if he had only a few pieces of advice to give to an entrepreneur who found himself or herself defaulting on debt or leases, what would that advice be. Here, reduced to some bullet points is what he said:

  •  There is hope. In the current climate, lenders and landlords are dealing with many problem situations, and they are likely to be realistic. It is never a good time to have a problem, but there will never be a better time than now because the economic climate looks bad for lenders and landlords too. They can only do so much with massive problem defaults. As a result they are likely to be willing to work with you. 
  •  Be wary of changes in loan officers. If your bank suddenly changes loan officers, you may be in an undeclared workout.  Prepare for aggressive treatment from your lender.  No more Mr. nice guy here!
  •  Keep your cool. As a general proposition, it will not help to become emotional and/or confrontational. 
  •  Deal wisely with your cash. If you are in this situation, cash is short. It costs money to go through a foreclosure or a bankruptcy. You are likely to end up paying attorneys and others upfront. Conserve cash whenever possible.
  •  Don’t fool with the IRS or state tax collectors. There are certain obligations such as withholding, sales tax, payroll etc. that must be paid or dire consequences could follow. Do not let the bank short you on A/R advances for these expenses.  Threaten to quit if necessary.
  •  Consider your lender’s offset rights. Your lender can grab the cash in your account.  If your lender does this, it will leave you without the ability to pay payroll, withholding tax, etc. Such an action could expose you and your fellow officers and directors to difficult financial liability.
  •  Think differently. If you know you are going to lose your business, change your focus to mitigating that issue alone.  Come up with a plan so that your creditors get the best outcome they can – you may run across the same lenders, suppliers, investors etc. in some future venture.
  • Review your situation with somebody knowledgeable. Your personal situation needs to be reviewed by someone who is familiar with small business lending, leases, personal guarantees, investor documents, and your obligations under all the laws that might apply to you.

Anyway, this is what Peter said, and it is all good advice. Remember, while it feels like a 2000 redo, entrepreneurs found their way through that bust and this one will be no different.