You’re Still a Fiduciary, Even When Your Company is Winding Down

There may come a time when your business needs to wind down its operations. And when it does, you’ll have two forces tugging at you, if you’re an owner or higher level officer.

On the one hand, you’ll have creditors (which may be why you’re winding down operations in the first place). On the other hand, you’ll have shareholders, who want to maximize dividends while they can, and who may see some profit left in the company that they feel should be divided amongst all of them.

Your Fiduciary Duties

You may already know that in your role, you are first and foremost, a fiduciary to the company. This means that your obligation is to the company first, before yourself. You have a duty to act diligently, with good business judgment, and to avoid even the appearance of a conflict of interest.

But those well intentioned motives often dissipate when owners or directors see the end of the company getting near.

And because those officers or directors often know that the end is near before the company’s shareholders do, they often do things that cross the line. They may start to liquidate corporate property, or take money out of bank accounts, or do things to make sure that they are financially taken care of, before they start the formal process of winding down corporate operations and worrying about directors or shareholders.

Notifying Creditors

As a fiduciary, once your company is dissolved, you must notify your creditors that the company has been dissolved.

This is the first step in making sure you aren’t accused of breaching your fiduciary duty—you don’t want to seem like you’re hiding anything from creditors. You should even inform creditors before you are formally dissolved with the state, if and when it becomes clear that the company is, essentially, insolvent.

Protecting Creditors

It may seem like an odd position to be in, but as a company fiduciary, when the company is winding down, you do have a duty to protect the company’s creditors. Defrauding creditors can lead to lawsuits against the company and its shareholders, and you don’t want that.

That means that shareholders’ or even your own interests, must come secondary to that of company creditors (unless, of course, you legitimately dispute the validity of a claimed debt, in which case that would have to be resolved in or out of court).

Remember that shareholders get dividends from profits of a company. The profits are calculated after losses or indebtedness of a company. That means that until creditors are paid or their claims resolved, you don’t really know what is available to distribute to shareholders or anybody else.

Don’t Make Mistakes

Doing things like liquidating assets for no money, “transferring” property to others for no compensation, hiding assets, or transferring property into other business, all could get you, individually, in deep trouble with creditors (and could also imperil whatever new business venture that you may be starting afterwards).

Problems with creditors?  Call the West Palm Beach business lawyers at The Law Offices of Larry E. Bray today for help and legal guidance.

Sources:

floridabar.org/the-florida-bar-journal/understanding-fiduciary-duty/

investopedia.com/ask/answers/09/corporate-liquidation-unpaid-taxes-wages.asp#:~:text=In%20general%2C%20secured%20creditors%20have,paid%20prior%20to%20equity%20shareholders