1

I worked in Colorado, USA for a startup.

On a Monday morning we were informed that our investor decided not to continue investing in our company and so our payroll from that last Friday was paid for/fronted by the HR company. After a tumultuous week, we were informed on Friday that our company was closing and that we would not be paid the final paycheck owed us. In some follow up discussions, I learned that our investor's investments were "debt investments" and were "secured debt". I was told this means that in the bankruptcy his investments will be paid before being paid that final paycheck or for unpaid PTO. Given the size of this secured debt (over 20 million USD), it seems unlikely we will receive any payment for those. As far as I know the company has not yet filed for bankruptcy but has rather ceased operations. It sounds like some bills are being paid with new money from the investor.

When does a CEO (or the investor or the board) have to notify employees they will be unable to pay them for work already done?

Does an investor have a responsibility to ensure all employees are paid?

Do the employees have any recourse?

Is "secured debt" real? And does that reduce the likelihood of receiving a paycheck in a bankruptcy settlement?

Does any of this change if the company doesn't file for bankruptcy?

4

When does a CEO (or the investor or the board) have to notify employees they will be unable to pay them for work already done?

Directors and officers (which includes executive officers like the CEO) but not investors have a duty to ensure that the corporation does not trade while insolvent. In this context, "trading" means incurring new debts and "insolvent" means being unable to pay their debts as and when they fall due.

Unfortunately, it is a judgment call by those directors and officers and the exact point where it occurred is generally only clear with hindsight, if then. For example, you describe a "tumultuous week"; quite likely the company was urgently seeking additional sources of funds and until it was clear they had no prospect of getting those, they weren't insolvent. The director's duty is to act reasonably (a broad range of activities) and not be overly pessimistic nor optimistic about the company's prospects.

As far as I know, they don't have a positive duty to inform their creditors that they can't pay. If that happens their obligation is to file for bankruptcy and their obligations cease - the bankruptcy trustee then invites creditors to prove their debts.

Does an investor have a responsibility to ensure all employees are paid?

No. That is pretty much the purpose of limited liability corporations: to shield the investor from the debts of the company.

Do the employees have any recourse?

Yes. Employees are typically priority creditors in Colorado and rank ahead of many other creditors. However, if the company is not based in Colorado different laws will apply.

Of course, you must be an employee of the company - this priority doesn't apply to true independent contractors.

Also, the liquidator's fees rank ahead of anyone and unless the bankrupt company has adequate realizable assets, even employees are unlikely to get a dividend.

You also need to be clear who you work for as you say "that last Friday was paid for/fronted by the HR company". Do you work for the bankrupt company or this (non-bankrupt) HR company? If the latter then they owe you your wages and the bankruptcy of their principal is their problem, not yours.

Is "secured debt" real? And does that reduce the likelihood of receiving a paycheck in a bankruptcy settlement?

Yes.

There is a priority in the payment of creditors in liquidations and it varies by jurisdiction but a typical arrangement might go like:

  1. Liquidator's Fees
  2. Employee wages and entitlement accrued within the last 6 months
  3. Certain taxes
  4. Secured creditors (who may have a ranking among themselves)
  5. Unsecured creditors (including employee entitlements more than 12 months old, other taxes, trade creditors etc.)
  6. Shareholders (who may have a ranking among themselves)

Basically, the lower you rank, the less likely you are to see a dividend.

Does any of this change if the company doesn't file for bankruptcy?

Sure. Until the company does this it is still a going concern and it has to pay its debts. If it doesn't it's creditors can sue and recover their monies as best they can which may include forcing the company into bankruptcy.

| improve this answer | |
  • To clarify: I work for the soon-to-be bankrupt company. My last paycheck went unpaid; the paycheck before that was paid for by my soon-to-be bankrupt company's HR company so my ex-company owes them for that debt, not me. – oconnor0 Feb 3 at 2:58

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.