Question

Boris forms “Boris Incorporated”. He issues 1000 shares of stock to himself, at a par value of $1.00; paying the corporation $1000.00 for the stock. This is all the stock outstanding and all the capital contributed. During his operation of the corporation, he runs up $10,000 worth of debt to various creditors including $5000 worth of debt to Grutz, for rent. He also pays his person phone bill from corporate funds, and other personal bills with corporate funds. Eventually Boris Incorporated dissolves owing Grutz $5,000.00.

What are Grutz’s options for recovering some or all of these funds? Fully explain your answer.

Answer 1

Grutz's options for recovering some or all of these funds are as follows:

Usually the director is not responsible for paying the company's debts. It means that if the company did not pay any debts, and the creditor takes court action, the company's assets are at risk and not the director himself. If the company dissolves the ultimate responsibility will be of the owners i.e. members/shareholders of the company. The members/shareholders and the company business is treated as one legal entity and are responsible for the company's debts.

In our case, Boris is the director of "Boris Incorporated" and he is not responsible for the company's debts. But the ultimate responsibility will be of the owners. Here in the present case Boris himself is the shareholder of all the stocks in the company. Therefore he is responsible to the company's debts which are unpaid.

There are some cases where the director is personally liable for company's debts. If the director deliberately makes an attempt to close the company to avoid repayment of debts to the creditors then the director will be held responsible and the creditor main apply for the company to be reinstated. The creditor can take action to recover the debt by applying for the company ye to be reinstated to the Companies House Register. This brings additional risks to the company director i.e. Boris as their conduct is investigated, potentially leading to personal liability for company's debts and shall be disqualified as a director if he contravenes the the laws and regulations made.

According to the information given, he used corporate funds to pay his person phone bill and other personal bills. It's illegal if the director misuses the corporate funds for personal purposes. In legal terms it is breach of fiduciary duty to misuse funds, breach of fiduciary duty of loyalty, breach of fiduciary duty to care and can be sued. So in this case, Grutz can apply for the company to be reinstated and can recover his rent wholly or partially and check whether Boris made a notification that the company is being dissolved and sue Boris if prior intimation is not given and for using the Corporate funds for his personal purposes. In this way Boris is held responsible and cannot escape from the scandal and Grutz can recover his debts.