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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 117401
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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Hi, I have a personnel placement service that is an ...

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Hi, I have a personnel placement service that is an SCorp, cash based accounting business in Ohio. Due to small business closures a lot of our customers have defaulted on their bills owed to me. I no longer have money to pay my workers'' comp, and other taxes and bills owed. What happens now? I want to close the company immediately but how do I deal with creditors? I have never not paid a debt before, but due to my customers'' not paying, I can not pay. As crass as it sounds, what if any, bills will I have to pay on a personal level if the S corporation closes due to lack of funds?
Submitted: 9 years ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 9 years ago.
An alternative to bankruptcy would be to file to place your company into receivership in state court. The increasing popularity of receivership may be the result of a perception that it will be less costly and complex than federal bankruptcy. However, I think parties are also attracted to the concept that they can define how the receivership will operate in a way not possible in the more structured federal bankruptcy proceeding.

In Ohio, receiverships are governed primarily by the provisions of Ohio Revised Code Chapter 2735 and the local rules of the trial court in which the action is commenced. In recent years, the primary use of receiverships in Ohio has been in conjunction with a foreclosure of income-producing commercial property by a mortgagee during the pendency of the lawsuit prior to the foreclosure sale. However, Ohio Revised Code §2735.01 also permits appointment of a receiver to carry out the terms of a judgment, in cases of corporate insolvency or “in all other cases in which receivers have been appointed by the usages of equity.” In addition, Ohio Revised Code §1701.90 specifically authorizes appointment of a receiver for the winding up of the affairs of a corporation and Ohio Revised Code §1701.91 regarding judicial dissolution of a corporation also contemplates use of a receiver.

Under Ohio law, both the circumstances justifying appointment of a receiver and the powers a receiver will have once appointed remain highly flexible. While Ohio courts routinely note that appointment of a receiver is an “extraordinary remedy”, there also seems to be substantial deference given to a trial court’s determination that it is appropriate in particular circumstances. Aside from relatively sparse case law, the only guidance regarding the scope of an Ohio receiver is found in Ohio Revised Code §2735.04 which states that a receiver “may bring and defend actions in his own name as receiver, take and keep possession of property, receive rents, collect, compound for, and compromise demands, make transfers, and generally do such acts respecting the property as the court authorizes.” Thus, unlike federal bankruptcy court where the rights and obligations of debtor and creditor are fairly clear, in an Ohio receivership action, the outer limits of permissible action by receivers has not yet been established.

Since I began practicing law more than twenty years ago, Ohio receivership law has always been a somewhat uncertain body of law. In past years, however, that uncertainty seemed to encourage use of federal bankruptcy courts in insolvency situations. Now, however, that very uncertainty and lack of established rules seems to be attracting both creditors and debtors as if they see receiverships as a “design your own” solution.

At the same time, however, one can see some influence of bankruptcy law. Orders appointing receivers now regularly contain “automatic stay” type provisions. Frequently, a claims determination process similar to the proof of claim requirements in bankruptcy is mandated. Asset sales are often modeled after the procedures used in bankruptcy court.

Whether receivership is the answer in any particular case depends upon your role in the situation and what you hope to achieve in an insovency proceeding. While the relative informality of the state court receivership is alluring, I believe that in general both debtors, and especially creditors, are better served by participating in federal bankruptcy proceedings.

For creditors, while I understand the attraction of perhaps being able to get orders from state court judges allowing the creditor all sorts of latitude in dealing with the assets of a debtor, I remain unconvinced that receivership will ultimately be less expensive. The fact that there ARE established priocedures and responsibilities in a bankruptcy proceeding seem to me more likely to expedite resolution than the situation in state court receivership in which every issue is one in which almost anything could happen. Moreover, aggreesive collection action seems more likely than receivership to result in available cash flow and assets being directed specifically in the direction of my client.

For debtors wishing to continue in business, state court receivership may actually offer a viable alternative to Chapter 11 proceedings which are indeed quite expensive. Because Ohio receivership law is so undeveloped, there is an opportunity to choose which aspects of federal bankruptcy law are most beneficial while perhaps avoiding those considered less desirable. Depending upon how the receiver is selected and the relationship which develops between the receiver and the principals of the debtor, state court may offer real opportunities for resurgence. However, control over the company’s business affairs may just as easily be irretrievably lost due to the sweeping scope of a receiver’s powers.

For debtors intending to liquidate, the advantage of a federal bankruptcy proceeding is that there is established law about what the effect of such a proceeding is.

As far as your personal liablity, that is the purpose of the SCorp, to insulate the owners from personal liablity. So, unless you made any personal guarantees on behalf of your S Corp, you should not be liable for any of the debts of the S-Corp.

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