When operating a business, minimizing risks is nearly as important as maximizing profits. Creating a legal entity such as a limited liability company or corporation is one simple step to minimize risks. We have written about the corporate shield and the limits to its protection. Even if you maintain the corporate shield, there are circumstances where your business’s creditors may be able to avoid the shield.
The Minnesota Legislature enacted statutory protections for creditors who deal with businesses. This legislation clarifies old common law principles of successor liability, and can be found at Minnesota Statutes Section 513. The Uniform Voidable Transactions Act (formerly the Uniform Fraudulent Transfer Act) is designed to prevent a company from avoiding its debts by transferring assets to another company or individual. It allows a creditor to avoid corporate shields and collect the debt from other companies or individuals. Understanding the pitfalls that can subject your company to this treatment is critical, especially when your company falls on hard times.
The UVTA can be used by creditors to undo transactions a company makes under certain circumstances. It identifies two categories of voidable transfer: those voidable as to present creditors and those voidable as to present and future creditors. A transfer made by a company is voidable to a present creditor if two elements are met: (1) the company was insolvent or became insolvent as a result of the transfer, and (2) the company did not receive reasonably equivalent value in exchange. If these elements are met, any of the company’s current creditors can sue the company to have the transfer undone and get at the transferred assets.
Transfers made with the intent to hinder, delay, or defraud a creditor are voidable as to current and future creditors alike. The statute lists eleven factors to consider in determining the intent of the company in making the transfer. One significant factor is the relationship between the company and the entity the assets were transferred to. Transfers between a company and its owners or other companies its owners own – regularly referred to as “insiders” – are closely scrutinized.
As a business owner, it is critical to understand the measures you can take to maintain your company’s legal independence. For example, any business you engage in with your own company absolutely must be well documented and must be objectively fair. This is also true of transactions you make between companies you own, and transactions you make between your company and your family. If you act carelessly, you can expose all your personal assets to your company’s creditors, and effectively lose all security your company provides you.