Can strategic bankruptcy be used against investors? Can bankruptcy be used as strategy to avoid paying back investors? Are there examples of such behavior? What are the mechanisms in place in US law to prevent people from creating a company to attract investors with the intent of filing for bankruptcy as a strategy to not repay their debt?
Can bankruptcy be used as strategy to avoid paying back investors? Are there examples of such behavior? In the United States, a Chapter 11 bankruptcy is frequently used as a way to cancel equity investments and to reduce or eliminate long term bond debt (especially subordinated bond investments) by senior management, in an effort to keep the business operating as a going concern and keep their elite senior executive jobs, and the jobs of many subordinate employees and contractors of the business. Pretty much every single business bankruptcy reduces the amount of return that investors in the company can receive from it (although there are rare cases when investors can be compensated in full in an orderly disposition of a company's assets but bankruptcy is filed to prevent a fire sale of assets in a disorderly fashion that would hurt investors, or hurt them more than the alternative outcome). A key factor here is the segregation of ownership and management in most big businesses. A large equity owner in a company is in a poor position to defraud other equity owners in bankruptcy, however, and equity owners are behind debt investors in priority in bankruptcy, so it is also hard for the equity owner to use bankruptcy to defraud debt investors without hurting the large equity owner. In some ways, this is a variant on a leveraged buy-out by management, because usually, in a big business bankruptcy, a key step is for management to secure a third-party lender to the bankruptcy debtor (G.E. Capital was the dominant lender in this market for many years), to finance the continued operations of the business until a plan could be put in the place to reorganize the company with less debt and none of its old equity investors. This is almost never a strategy of the company at the outset. It is one that is chosen once it becomes clear that its business model has ceased to be viable with the amount of leverage that the business has. Often, in such a plan, some long term debt that is not subordinated is converted to equity, although that equity is usually worth less than the original equity investment of the investors in the firm. Typically, this strategy is used when a company with a large initial capital investment is in a market where it can still make a profit relative to its variable operating costs from the revenues it can secure in current market conditions, but can no longer afford to service its long term debt that was used to make that large initial capital investment (e.g. in a building or factory) that has decreased in value because the products made with that investment are no longer as valuable as they used to be, or because, for example, patents expired but the long term debt wasn't paid off during the terms of the patents. For example, many U.S. coal mining companies in the U.S. have recently had Chapter 11 bankruptcies. These companies made large investments in coal mining operations that were economically sensible when coal was worth more and alternatives to coal were not economically viable. But, when renewable energy became cheaper with changes in technology, and environmental requirements made coal fired power plants more expensive, the market price for coal collapsed and those companies could no longer support the debt that made it possible to conduct the mining operations that these companies had incurred. In a reorganized fashion, some of these companies could continue to be viable with lower sales volume and lower coal prices since they now only had to pay current operating costs and not obligations to investors in those companies. What are the mechanisms in place in US law to prevent people from creating a company to attract investors with the intent of filing for bankruptcy as a strategy to not repay their debt? This strategy doesn't really make sense as a plan from the issuing company's point of view, it only makes sense if the person promoting the scheme has some way to extract value from the investment made by the investors. The company itself that issued the securities (typically stock or corporate bonds) in which the investor invested also isn't a suitable target of litigation because the company that issued the securities simply doesn't have the assets to pay damages to the investors. If one can show that the company incurred debt with an intent not to repay it, and is followed by transfers out of the company without receiving substantially equivalent value in exchange to some third party behind the scheme, this can be regulated by fraudulent transfer laws. See Section 4(a)(2) in the Uniform Act numbering although individual states adopting the act as state law invariably number the sections differently). This conduct can also be used to seek securities fraud liability or common law fraud liability from the persons other than the company itself (such as its officers or brokers or promoters of some other kind) involved in promoting the company. Footnote Re Importance Of A Formal Bankruptcy The bankruptcy code component of this analysis isn't a particularly important part of the strategy. A limited liability entity can dissolve itself, or make an assignment for the benefit of its creditors of all of its assets, or be placed in a receivership, outside of bankruptcy, with similar effect, since the discharge of debts is not relief associated with a Chapter 7 liquidation of a limited liability entity (although debts can be reduced or eliminated as part of a Chapter 11 plan so long as the creditors are at least as well off as they would be in a Chapter 7 liquidation or otherwise consent to the plan).
If I understand your question correctly, you have some clients who have paid you for services that you have not yet provided and, indeed, they have not yet requested. Is this correct? The accounting term for this is a "prepayment". The correct accounting treatment is to increase an asset account (your bank account) and create a liability account (Prepayments or something similar). You need to talk to your accountant about how to treat these for consumption and income taxes. Legally, these people are now creditors of your business - just like all of your suppliers and employees. There is no legal requirement to escrow or otherwise treat this as trust money. Basically, if your business goes bust they will lose their money. This is something that you should have dealt with in your contract with your customers - if you are running an online business then you should get a lawyer to revise your terms of service to cover things like how they can ask for a refund (and how long you have to get it to them) and how long (or if) they forfeit the funds. As it stands the money effectively becomes yours after whatever time under a statute of limitation applies to transactions of this type and size (under whatever law applies to the contract) since after that time they cannot sue to get it back.
There is a legal dictum, de minimis non curat lex, which might lead to an exasperated court official refusing to issue your lawsuit (with or without providing the $1 out of his own pocket to save everybody's time); I recommend you look it up. But there is no official term for what you suggest, although many lawyers might off the record provide colourful descriptions. If you wish to waste your money on such a claim, then obviously in your view it is worth pursuing. Clients often say "the principle is more important than the money", though they say so more often before they receive the bills than after.
I see that this would put me under heavy US regulation, and I'd like to avoid that, since it would require huge funding to hire lawyers to do something like that. There are many reasons for financial and banking industry regulations; namely, fraud protection, corruption and money laundering preventions, use of crypto to avoid taxes and records, etc. If you're serious about a startup that involves financial transaction, one of the first things you do is find a law firm to advise you on the legal plausibility of an idea. And be prepared to spend thousands and thousands of dollars in legal fees for regulatory approval. Would doing something like this solve my problem? You're really going to trust randos on the web for legal advice?
No Let's consider a similar scenario. If you made a beverage which poisoned a number of people, would you be absolved of liability because you gave it away for free? Of course not. As there is no contract between you, they would have to bring an action against you in the tort of negligence or negligent misstatement OR under consumer protection law. To succeed at tort they would need to prove that you owed them a duty of care; from Donoghue v Stevenson "You must take reasonable care to avoid acts or omissions which you can reasonable foresee would be likely to injure ... persons who are so closely and directly affected by my act that I ought reasonably have them in contemplation ...". Most cases will founder on your inability to foresee the use to which your software may be put. Consumer law is jurisdiction specific but they generally contain warranties that what you provide (gratis or otherwise) is fit for purpose, merchantable and that you do not make false and misleading statements. There is a chance that a case brought under this sort of law could succeed as you have not limited the purpose, specifically declared that it is not of merchantable quality and have (presumable) said what it does so that, if it doesn't do what you said, you have been misleading and deceptive.
Under U.S. law, this is only actionable is you make this statement knowing that it would not "support the continued creation of X" and that instead, you had already completely abandoned that product and you were, for example, planning to change lines of work and become a lumberjack instead. Even in that case, common law fraud is hard to show, because you would need to show how that statement which related to how the profits will be used, rather than what you are actually receiving, could cause you damages in that narrow transaction. But, many states have deceptive trade practices acts that protect consumers by allowing the attorney general, local prosecutor, or a private individual or class of plaintiffs to sue if representations such as these are made when they are known to be false. Typically, these lawsuits provide for minimum statutory damages, attorneys' fees award, and when cases are brought by a public official, injunctive relief (ordering the advertising with that pitch to cease) are authorized. For example, saying this when it is false would be actionable in California and Colorado. A fairly common fact pattern is that someone will sell stuff at an above market price saying that "profits will help me pay for my cancer treatments" when in fact the person doesn't have cancer. This could even constitute criminal wire and mail fraud, for example. Sometimes, competitors can also sue you under the Lanham Act (which primarily governs federal trademarks), for false advertising about something that could unfairly undermine their sales if what you are saying isn't true and is causing their sales to drop. On the other hand, if you sincerely believe that what you are saying is true when you say it, and your belief is not so unreasonable that no reasonable person could believe that under the circumstances, then what you are saying is legal. Usually this is true, and if it is, ultimately, you will be fine. Although nothing can prevent you from being sued on a non-meritorious basis. In between are cases where this is true (you will be supported, but perhaps only get 5% of the profits while the rest are garnished for a lawsuit), but your statements were still misleading at the time you made them and you knew it. Those cases get resolved on a case by case basis. Outside U.S. law, your mileage may vary. Legal regulation of commercial speech varies significantly from one country to another. These statements might not be O.K. for example in a Communist regime on the Chinese or Korean model.
Interesting question. I routinely write wills that authorize the executor to destroy property that has no significant economic or sentimental value, but I've never encountered a case where a testator or testatrix has directed that property be destroyed and I've never seen a reported case (or even a news report) in which that has happened. To the extent that an estate is solvent, there is no reason that a creditor could complain and if the destruction was done in a safe manner (as opposed to burning down a house or something like that without consulting the fire department) I'm not sure that there would be a public interest in doing so either. There are many religions that had a practice historically of burying someone with grave goods, so there are reasonable First Amendment freedom of religion arguments for allowing such a practice if it had a religious basis. And, if no interested party objected, I don't see how anyone could stop the executor from acting, unless the property to be destroyed was, for example, evidence of a crime, in which case it would be a crime to destroy it and the provision of the will would be void because it was a crime to carry it out. If an executor sought permission from a court to carry out this instruction, the court might require a public notice of the planned destruction to give notice to any third party who might claim an ownership interest in the property allegedly belonging to the decedent. On the other hand, usually, all interested parties in an estate can agree to act contrary to a will by unanimous consent, in which case no one would have standing to fight for the provision in court (unless it was considered a charitable bequest, in which case a state attorney general or an advocate appointed by the court with the "will" as the client could defend it). Given the strong public policies in the law disfavoring "waste" (i.e. useless destruction of property) such a provision could be held to be void as against public policy (similarly, bequests contingent upon marriage decisions are now void as against public policy).
Could the victim report this as fraud, theft or some other related crime? They could, but it's unclear whether they would be successful. A criminal conviction would require intent on the part of the company or an employee, and that will probably be difficult to prove. In a big system like this, individuals can usually claim misunderstandings and errors of omission, which makes such a proof difficult. They could try to establish criminal corporate liability, but again this is difficult to prove. So while possible, it's probably not worth it. Would the answer to the previous question differ based on whether the victim was eventually able to recover the money through litigation or by disputing the charge with their bank? Probably not. For a criminal conviction, it's necessary to prove that the company or an employee deliberately took money they knew was not theirs. Whether they later gave it back is not relevant for determining guilt (though it may reduce the sentence). Would the company itself or the specific employees involved be liable? In principle, both could be held liable. Again, this depends on what can be proved in court. Would a binding arbitration clause in the contract have any effect on criminal liability No, arbitration clauses cannot protect from criminal liability, only from civil liability (within limits). Off-topic: The fastest way to resolve such situations is usually to write one stern letter explaining why you are owed the money. If that does not work, sue them - if the situation is clear-cut, you will most likely win, or the company will settle. Many jurisdictions have simplified court proceedings for clear cases like this, for example the Mahnverfahren in Germany.