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If a company has loaned money to another company but then dissolves

before the due date of...
If a company has loaned money to another company but then dissolves before the due date of that loan, what happens to the loan?

Does the money still get paid back to the owner of the company or is it considered bad debt in the dissolution of the company?

The company in the process of dissolution is a small company which never had any profits. It is not being sold to anyone else. The debt in question has not been sold to anyone else either.

Thank you for any insight into this question.
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Answered in 1 minute by:
9/14/2013
CalAttorney2
CalAttorney2, Attorney
Category: Business Law
Satisfied Customers: 10,244
Experience: I am a businesses law attorney, with experience advising and representing owners and investors.
Verified

William B. Esq. :

Thank you for using our service. My name is XXXXX XXXXX I would like to assist you today.

William B. Esq. :

It can sometimes be difficult to ensure we are discussing the correct issue, so I want to confirm that the company that is dissolving in your situation was the lender NOT the borrower, is that correct?

Customer:

Yes. It is the lender.

William B. Esq. :

The creditors of the dissolving company, or its owners will be entitled to payment as it becomes due.

William B. Esq. :

What type of entity is it?

Customer:

It is a corporation.

William B. Esq. :

The corporation as part of its "wind down" would have to collect on the debt (either make arrangements to assign the debt, or make arrangements for disbursements to creditors first and shareholders second as payments arrive from the debtor).

Customer:

Under tax law it would be classified as a personal Holding corporation.

Customer:

I want to make sure I understand. If the company dissolves and only had one shareholder and no debts, then the payments would go to the shareholder? What if for example if the company is dissolving due to the death of the owner, then the payment would go to the heirs?

William B. Esq. :

That is correct. But it is important to be clear as to how payments are made. They are made to the corporation. The corporation is "winding down" (over the course of the loan repayment), and makes disbursements immediately to the shareholder. The disbursement goes to the shareholder's estate (his heirs).

William B. Esq. :

Alternatively, the corporation can "assign" the debt, and simply have the payments go directly to the heirs or to anyone else (this is usually used to get a "lump sum" by selling the debt to someone else for cash now). The best way to make a decision on how to go about doing this is to speak with a tax specialist to make an "after tax analysis" (assuming all else is equal and you have no other considerations to worry about).

Customer:

Okay. this may be a bit complicated. What if the corporation is closed without making arrangements for the repayment of the debt. The loan is not due for another two years. No discussion is being initiated and I have heard through the CPA that the company is being dissolved without discussion.

William B. Esq. :

The corporation can still exist for purposes of receiving the debt. It may be inactive or suspended with the Secretary of State, but it can still exist to "wind down" its business.

Customer:

So even if it is dissolved, closed, etc...it can receive monies to it regardless if the bank accounts have been closed. I just want to make sure. I am the treasurer for the company and am out of the loop on this one.

William B. Esq. :

The corporation should not yet be dissolved, it can be inactive. If there is an outstanding debt and the corporation wants to wind up properly (get to a dissolution), then yes it needs to make an assignment of the debt in order to dissolve, but if the corporation wants to just "fade away" it can do so and still collect.


If you are the treasurer for the corporation and want to have some sort of input into how this debt is repaid, having an account set aside for the sole purpose of receiving these payments, with a meeting for dissolution after 2 years, or some other business plan will work, but I really would suggest getting an "after tax assessment" to see whether it is worth keeping the corporation around for 2 more years (in a cursory form), or simply assigning it and dissolving it completely now.


This is a business call as to which way your company wants to go, (I apologize for my misunderstanding earlier, I thought the company was already defunct and was just waiting to collect), but working with an accountant to see what is best for the shareholders after taxes is usually the deciding factor.

Customer:

My concern is that the people involved are not interested in doing things properly. It is the intention to completely close the company. The bank accounts have already been closed. State fees not paid, taxes not done, just complete disregard to the company and legal procedures. I am told there is no intention to do anything to close the company either...it is just left undone.

Customer:

I am concerned that there could be a loop hole in repayment. Is there any way the borrowers would not have to repay the loans? Is there anything I should watch for?

William B. Esq. :

The borrower will still owe the debt. The corporation will have internal issues collecting on it. The biggest problem that the corporation may create for itself is that it cannot sue to collect on the debt if it is not Active with the Secretary of State. If you are suspended or inactive as a corporation, you cannot bring or defend against litigation. This means that if the borrower defaults, the corporation will have to reform and reopen its status with the Secretary (not to mention reconstructing its internal framework).

Customer:

Okay. That is not too hard though. Just filing paperwork and paying fees.

Customer:

Thank you. that helps put me at ease somewhat.

William B. Esq. :

You are welcome, thank you for using our service. (You do have a rather difficult situation - if you are able to find a way to make the taxes work and swing an assignment, it might make it a lot easier, but that is just general experience, it certainly does not apply to every situation, and may not apply to yours).

Customer:

Thank you. I will take that into consideration. Have a great night.

CalAttorney2
CalAttorney2, Attorney
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