Successor Or Alter Ego Company? It Makes A Difference
So your company didn’t do well. Maybe it closed, you liquidated it, or filed for bankruptcy. But you’re convinced that if you can do it again, and do it the right way, things can be different this time. Should you start what is known as a successor company?
A successor company is just a company that takes over from and after another company fails. There may be a number of similarities between the old and the new, successor company (including our involvement in both). But although similar in many ways to your old company, your successor company is a new entity, separate from the old one.
Alter Ego Companies
Or is it? It is supposed to be, if it is truly a successor company. But often it is not. Often, a successor company is so similar to a prior company that it isn’t actually a successor. It is actually the old company, just continuing in business, with the new company being nothing more than an alter ego.
This is a big difference, because successor companies, being separate, aren’t responsible for the debts, liabilities or obligations of the old company. An alter ego company may be. And if a judge feels your new company is just an alter ego, the courts (or a creditor who files a lawsuit against your new company) could find that your new company has assumed the debts, liabilities, contracts and obligations of the old company.
Courts will often ask if your new, successor company is simply a reincarnation of the old company, or just the old company operating under a different name.
Mistakes Businesses Make
Sometimes, problems with successor companies are caused by the companies themselves. For example, the new, successor company may just decide to pay the debts of the old company. The new company may use the same name as the old company.
The new company may continue on with pre-existing contracts or leases that were signed by the old company. The new company may have simply assumed the old company’s bank accounts, without opening new ones.
There is no bright line, hard line test to see whether a company is a true, separate successor, or whether it is in fact just the old company in different skin. Certainly, the more differences between the companies, the better it will be for our new company.
If at all possible, try to start your new company the same way you would if the old company never existed.
Certainly, you can use your old procedures, and your existing customer base. But also look at your similarities to the old company—including whether your shareholders, officers, or board of directors are exactly the same as the old company. These can all be telling signs to a court that our new company isn’t really a new company at all.
Call the West Palm Beach commercial litigation lawyers at Pike & Lustig if you are involved in any kind of business or commercial litigation matters.