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This summer I did freelance work for a very early stage startup. We had a contract for an 8 week project wherein they should have paid me half of the fee after 4 weeks, and the rest after 8 weeks. Four weeks came and went, and I received no payment. When I contacted them they said that they had issues with one of the founders, and asked me to pause the work.

Since then (it's been 5 months), they have avoided all contact with me and I have yet to be paid. I finally got a hold of them last week and was told that they are in the process of shutting down the company, and was offered about 20% of the payment owed for the first 4 weeks.

My question is - what will be the likely outcome be if I file a suit in small claims court? I know that the company has not been shut down yet, but they mentioned that it will be done by the end of the month. Should I rush to file a suit before the end of the month? Will it make a difference?

3

Suing them and winning may not be that difficult, and you can generally sue a business even if it ceases to operate as a going concern. Collecting the judgment you win, however, is likely to be very difficult.

Still if you are going to sue, the sooner the better, because outside of bankruptcy, the general rule is that the person who is first in time to actually seize the available assets of a company with more debts than assets is first in right to those assets. Also a squeaky wheel is often the one that gets the grease. "Shaming" companies on social media often works for going concerns, but is rarely effective when a company is actually going out of business soon.

There are special remedies available against recipients of improperly diverted funds when funds are deliberately sucked out of the organization without receiving anything in exchange for its money (this is called a "fraudulent transfer"), but those cases are expensive to bring and hard to prove. Often in the case of a legitimately failing business, operating losses and not improper diversion of funds from the company, is the reason that it doesn't have enough money to pay all of its debts in full, so this remedy is not available.

Winning a lawsuit simply gives you a piece of paper stating that the defendant owes you money which you can then use to seize money and property from the defendant and/or people who owe the defendant money, if you can find either of those things. But, you can't get blood out of a turnip, and the alternative formal collection mechanism (forcing an involuntary bankruptcy) requires the coordination of multiple significant creditors and may not provide much better results if the company has genuinely run out of money, although unpaid wages are often entitled to priority in bankruptcy up to a certain dollar amount which is a preference that is not generally available outside of bankruptcy court.

There are sometimes laws that can be invoked to hold people affiliated with the management of a defunct business personally responsible for unpaid wages (sometimes the Fair Labor Standards Act (FLSA), and sometimes state wage claim acts). And, very rarely in egregious cases that affect lots of people where there was an intent to stiff you before you finished earning new wages at the company, a local or state prosecutor will prosecute a company or its officers for "wage theft".

Finally, "freelancers" often have far fewer rights in efforts to collect wages than true employees, so a mere independent contractor is in a weaker position and should consider that fact when deciding whether or not to settle.

Bottom line: consider seriously accepting a settlement because the cost of collection and the unavailability of assets to collect from once it goes out of business may make a bird in the hand worth more than two in the bush.

  • Thank you for your extensive answer. I would like to clarify that this company is a startup that failed to get off the ground, so I don't think that they have any other debts to pay (no offices, no employees, etc). I also don't think that they are filing for bankruptcy, simply dissolving the company. – poor_grad_student Nov 3 '16 at 19:44
  • Sucks to be you. My wife works in promotions and so she and her colleagues encounter companies that slow pay and then shut down fairly often since each of them has dozens of employers in a given year and the industry has a lot of thinly capitalized businesses. Sounds like you are stuck and should grab what you can. – ohwilleke Nov 3 '16 at 19:47
  • I should add that the company is based in Canada, not the US. On this Canadian government website I found that companies may need to "Ensure the corporation is in good standing" and "Distribute remaining assets, property or liabilities" before dissolving a company. – poor_grad_student Nov 3 '16 at 19:47
  • Almost every U.S. corporation statute says the same thing, but in practice, remaining assets are liquidated, creditors tend to be paid in a more or less ad hoc way, and all that is left is a shell. – ohwilleke Nov 3 '16 at 19:49
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Take the 20% and then sue them for the balance: unless they give you something for giving up the 80% then you are not giving it up even if you say you will.

You do not give a jurisdiction but in Australia a company with outstanding liabilities (which is what your debt is) cannot be voluntarily would up - it must be liquidated by the appointment of a liquidator, either by the directors or the court. Having a debt proven in court is one trigger for you to ask the court to appoint a liquidator.

A director of a company which trades while insolvent (i.e. incurs new liabilities not being able to pay their debts as and when they fall due) is personally liable and committing a criminal offence. In practice, only egregious breaches are punished.

  • can you provide evidence for your assertion "unless they give you something for giving up the 80% then you are not giving it up even if you say you will." ? I find that pretty hard to believe. – davidgo Nov 4 '16 at 1:13
  • @davidgo there is a binding contract - unless the contract makes provision for variation then varying it is akin to forming a new contract which requires consideration from both parties. – Dale M Nov 4 '16 at 8:02

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