You open the paper to discover that a “new business”- NewCo has opened at the same location as a current borrower (OldCo). Upon further investigation, you drive by the former business location of OldCo and there is different signage. The loan file shows a history of delinquencies and calls to the borrower remain unanswered. Or, the borrower does answer but says that the company has gone out of business.….

What’s next?

For Lenders, this is the time to pull the file and send it to workout, amend risk ratings, undertake a collateral analysis, calculate recoverable balances, etc. But if there is even the suspicion that the borrower and its business may have conveniently morphed into something a bit different, it is time to act.

There are three simple steps you can take to secure the ammunition you may need to defeat a fraudulent transfer of a borrower’s assets. If you suspect a case of successor liability use the information readily available on the internet to build your arsenal:

  1. Check the Secretary of State CONCORD site to determine compliance with corporate formalities. Has the OldCo begun or completed the process of a legal dissolution? Has NewCo registered to do business legally? Who are the principals? What is the corporate address? Agent for service?
  2. Compile clues to determine if NewCo is simply a “mere continuation” of OldCo. Use Google to understand the type of business of NewCo, it’s location, employees and customers. What about advertising? What information is NewCo sending to customers? Using this information to compare with information provided by OldCo at loan inception will help establish whether NewCo is simply continuing the business of OldCo in its new form.
  3. Undertake a review of the Court docket and Tax Assessor information to determine whether closing OldCo may have been done to avoid creditors or debts. For example, are there legal actions pending or judgments obtained against OldCo? What are the outstanding tax liabilities of OldCo?

If after conducting this relatively simple due diligence, you smell the proverbial rat. Make copies of the information you have found and keep it in the loan file. The date stamp on printouts will be a valuable tool which can help bolster a claim of successor liability.