The Corporate Transparency Act (“the Act”) went into effect on January 1, 2024, to prevent individuals with malicious intent from attempting to facilitate illegally operated businesses in the United States. For more information related to the Act itself and how it may affect you and your business, click here to view a video with more detailed explanation.
The Corporate Transparency Act has designated that corporations, LLCs, and other business entities that are registered to do business in the United States must report their beneficial owners. A beneficial owner is one who owns or controls more than 25% and could also be an individual who exercises substantial control over the reporting company. These individuals include CEOs, CFOs, COOs, etc. Essentially, if an individual can affect decision making on behalf of the reporting company, they are subject to the Corporate Transparency Act disclosure requirements.
There are certain entities (23 to be exact) exempt from disclosure requirements from the Act. These include Banks, Credit Unions, Insurance Companies, Accounting Firms, an Inactive Entity, and others. For a full list, look at Section (C)(2) of the Act. But how do those intimately involved with bankruptcy proceedings navigate this new reporting landscape? A Bankruptcy Court in North Carolina help shed some light on the issue.
On February 28, 2024, the Bankruptcy Administrator for the United States Bankruptcy Court for the Eastern District of North Carolina moved the Court for an order to determine that a Chapter 7 trustee of a bankruptcy estate has no duty to report a beneficial ownership information under the Corporate Transparency Act.
The case, In re Boa Nutrition, Inc., No. 23-03665-PWM (Bank E.D.N.C.) is being presided over by Judge Pamela W. McAfee. The Bankruptcy Administrator noted that the debtor was subject to the Act, but the Bankruptcy Administrator should not be as they are merely representatives of the bankruptcy estate created upon the filing of the case. In other words, the Bankruptcy Administrator is involuntarily associated with the debtor’s business. But the Bankruptcy Administrator does technically do decision making on behalf of the reporting company or debtor.
As there is no caselaw on the subject, the Bankruptcy Administrator asked Judge McAfee to determine that a Chapter 7 trustee has no duty beneficial ownership information under the Act on the debtor’s behalf. Judge McAfee decided to not definitively rule on the question and asked the United States Department of Treasury for clarity. The United States Department of Treasury asked for an extension and will have a response by May 13, 2024.
The attorneys at Dalton & Tomich are monitoring and staying up to date with all changes related to the Corporate Transparency Act including how it effects the bankruptcy space. If you have any questions, please do not hesitate to reach out.
