Personal Liability In Taking Over An Old Company

[NewInvestor]

Does anyone know about the personal liability of a Managing Director who had little to do with an old company until he stepped in during 2009? All stock shares paid up in full in 2001. My main worry is what happens if there are missed taxes from the past. Am I liable for any of the company's past tax debt?

I'm well aware of the advice that you shouldn't take over an old company, but should instead set up a new company and transfer assets over, in order to avoid liability for hidden debts and other surprises you may find after taking over the company. My associate who just now introduced me to this forum said this is the response I will get here, so let me first clear this out as not an option in my case. I cannot set up a new company and transfer the assets of the existing company.

I am taking over a small company in Thailand which has been providing services to another company of mine. The reason I cannot set up a new company and transfer assets is because a few assets are still being paid off to creditors (for example, a car), and creditors will not accept the change of the debt to the new company.

The sole Managing Director of the past 7 years is leaving and everyone wants me to come in and take over the company, and it would also be helpful to my business to control this company. However, before I accept stock shares and the Managing Director position, I have required that all the books for 2008 be closed.

That means I am waiting for the previous Managing Director to submit and sign off on all accounting and the Annual Report for 2008, so I will start with January 2009.

I owned some shares from the beginning of the company in 2001 and invested in it initially but was never a Managing Director or signatory authority. The Managing Director from the start up to date has signed on everything. Now, the current Managing Director's stock shares will be mostly transferred to me, up to 49%, and then the shareholders will vote me in as sole Managing Director.

I'm not concerned about any intentionally hidden debts because I know these people well. Besides, if they caused a major problem for me by being tricky, then they would lose a lot in their futures.

My main concern is any past tax liability. I don't understand their accounting. The accountant speaks no English. I have gone over some of the accounting and it is confusing, to say the least. The accountant's attitude seems lax. I would never do things this way or hire somebody like that as my accountant. Now, after a heated exchange, we have decided that the accountant will leave together with the Managing Director.

My question is this:

If the government audits the company and finds out we did not pay enough taxes for 2008, or for any past year, what is my personal liability?

Thank you for reading about my situation, and I hope somebody knows the answer.

[NewInvestor]

I am surprised nobody has replied to my message. This must be a common problem, since selling and buying companies is common here in Thailand, taking them over by share transfers. Does this happen without anyone really knowing the laws and liabilities, either the broker or the buyer?

I have no broker, I am the buyer. Today, I asked different lawyers and business people and received different answers. It seems nobody knows for sure. Is this how Thailand operates? However, I cannot wait forever for answers, and the new accounting year seems to be the best time to take over a business for accounting reasons so I am now in a hurry. Also, I fly back out tomorrow. If no answers, then no signatures, and no extra investment.

This company manufactures and exports ladies clothes from Thailand. I import overseas. They do special custom designs and modifications for me. Unfortunately, they don't seem to have many other customers, their business is down from the recession, they are struggling financially and I am basically getting this business for very cheap if I will just keep paying their creditors and keep staff employed, take over responsibility for payments. I can help them and expand their business.

So I came on a surprise visit, did not tell them I am coming to Thailand, just knocked on their door, surprise, it's me! Everything looked normal. They were working on my order just like they said they were. Plus some things for other customers. Nothing suspicious. They were a little bit behind on my order as usual. Everything is too lax, too laid back. But they are nice and they have been reliable at producing to spec. And I don't want to start over anywhere else. I have known them 7 years, good relationship.

They have the equipment, their materials suppliers, their secrets, etc, but they are still a little bit poor and owe money. Not too much, just a little. I am a main customer to them, and I think a better profit for them. To me, they are just a small supplier, but they are reliable and resourceful enough, and I could move more business over to them. They are all Thai and don't know how to market overseas. Bad English, too. Two people can speak English. They just have contacts at the Pratunam market where I met them many years ago, and now have contacts at Platinum and some other places. Now they live off a few old customers but don't expand much, don't utilize all their resources much. It's in a big townhouse shop house in a Thai suburb, staff sleep on the top level.

My transactions were on their books, but there are a lot of things that are cash transactions with Thai buyers, not checks, in the accounting books but some receipts on paper say "cash". Nobody can answer my questions clearly. They say many businesses in Thailand operate on cash like this. Checking accounts are not popular.

Today they say I need a second director to sign on the bank account because I cannot when I am away. Sheesh!

If I could get a grip on this company, then this could be win-win, but I just don't want to get into trouble in any way in Thailand. I don't know the laws here about Managing Director liability. That is why I don't invest much yet in Thailand. Ask different lawyers and businessmen, get different answers or no answer. Like here on Thailand's biggest and best forum. Ask about Managing Director liability, no answers. So I don't invest. Yet.

It would be a nice country to live in as an Asia base of operations. Nice people. Good infrastructure. Good internet. Good airport hub, links everywhere. Good homes. But complicated business and difficult to get clear answers.

Edited January 9, 2009 by NewInvestor

[satiariyan]

You do not have any personal liability for anything some previous management might have done of dirty deeds. It's about the one and only beauty of companies (co., ltd.) compared to other juristic entities. Personal liability of the MD is limited to what he may do of "dirty" deeds while he is in the position.

However, the liability of the company regarding "forgotten" unpaid taxes, improper accounting principles and such goes back 5 years. The company will be responsible for back payments and fines - not you. (I appreciate it might not make any difference in your case, but that's the principle).

Edited January 9, 2009 by satiariyan

[NewInvestor]

You do not have any personal liability for anything some previous management might have done of dirty deeds. ... [full explanation above]

Thank you, Satiariyan, that is the answer I was looking for, and which no other experts here answered.

If it were any different, then few people would ever want to take over any company. It's good to see that Thailand has normal laws in this regard, and I guess there aren't any significant risks in Thai law as regards liability of Managing Director(s) taking over an old company which might possibly have some dodgy accounting due to the previous Managing Director and the accountant friend of the previous MD to date.

For starters, I think it's important to bring in an outsider accountant and remove the existing one.

Does anyone have any suggestions on how to find a freelance accountant who speaks English, for a fairly simple and small company? I don't need an accounting firm and all that overhead. (You can PrivateMessage me if you prefer.)

Edited January 16, 2009 by NewInvestor

[Arkady]

Satiaryan is right, you could not be held responsible for any criminal acts committed by the MD or any other former directors but the company remains responsible for the company's liablilitlies under the previous ownership and management, including tax. The best you can do is to get an outside firm to audit the books for anything that might cause problems and check with the Revenue Dept for any outstanding problems or ongoing investigations. The Revenue Dept takes its time and can go back several years and do very troublesome investigations, if something seems amiss in their eyes (you will not be able to guess yourself what they might consider as amiss). They went back 7 years on my company once and revised the past tax liabilities by disallowing foreign exchange losses retrospectively but taxing exchange gains through some twisted logic I never really understood. The have only just informed us that they plan to fine us for underestimating the earnings for 2007 at the half year which resulted from unexpected contract that came in in the last quarter. That is ridiculous but those are the rules.

You need the seller to indemnify you against any contingent liabilities that are not already provided for and disclosed. He might not even have clue what these are. Tax is a big one but there could also be legal cases looming out. Try to withhold some of the payment for a year or two as a guarentee against contigent liabilities. Watch out for proper VAT filing and payment. You would not be criminally liable for this but the company would have to pay past tax and fines if this hasn't been done properly.

[midas]

Satiaryan is right, you could not be held responsible for any criminal acts committed by the MD or any other former directors but the company remains responsible for the company's liablilitlies under the previous ownership and management, including tax. The best you can do is to get an outside firm to audit the books for anything that might cause problems and check with the Revenue Dept for any outstanding problems or ongoing investigations. The Revenue Dept takes its time and can go back several years and do very troublesome investigations, if something seems amiss in their eyes (you will not be able to guess yourself what they might consider as amiss). They went back 7 years on my company once and revised the past tax liabilities by disallowing foreign exchange losses retrospectively but taxing exchange gains through some twisted logic I never really understood. The have only just informed us that they plan to fine us for underestimating the earnings for 2007 at the half year which resulted from unexpected contract that came in in the last quarter. That is ridiculous but those are the rules.

You need the seller to indemnify you against any contingent liabilities that are not already provided for and disclosed. He might not even have clue what these are. Tax is a big one but there could also be legal cases looming out. Try to withhold some of the payment for a year or two as a guarentee against contigent liabilities. Watch out for proper VAT filing and payment. You would not be criminally liable for this but the company would have to pay past tax and fines if this hasn't been done properly.

And because this is Thailand I would not even settle for this

just being in black and white

I would only accept a decent sum of money being deposited

with 3rd parties ( like escrow ) until the risk is over .

Otherwise the sellers could just leave the scene and leave you

with the liabilty even if it was in writing they would indemnify you