If an employee signs a contract on behalf of a business (in the course of their job), and the business never pays its dues, can collections agencies try to collect from the employee whose name is on the contract?
Hypothetically, say Bob works for CheezOats Barz. As marketing director for CheezOats Barz, Bob hired an advertising company, SellYerGoods, to do an ad campaign for the cheesiest porridge bars on the planet. Four years later, after he’s quit his job and now works for someone else, could a collections agency call Bob and say: “You still owe us eleventy-thousand for the ad campaign?”
Here’s three different scenarios to explore the question:
The company is incorporated
The company is not incorporated but is a registered business and Donald Oats is proprietor
Bob was not an employee but was a volunteer
Not looking for legal advice of course. It’s purely hypothetical. The question came up when a buddy got a call from a recording studio that was trying to track down a wannabe rock star for whom my buddy was once a session musician (wannabe rockstar owes them for something). They weren’t asking my buddy for money or anything, but it got us wondering how studios and record labels deal with bands that break up and such.
Generally not. If the principal/agent relationship is fully disclosed, the agent is not liable on a contract made in the course and scope of his agency. If the agency relationship is not disclosed or the principal is only partially disclosed, it gets more complicated:
So if Bob signed a contract to purchase 5,000 printed wrappers for CheezOats Barz, and all the communications said: “Bob, Marketing Director, CheezOats Company” and the shipping address was “CheezOats Company, Porridgeville, Indiana” the company alone is liable, but if it was just “Bob” ordered the wraps and the shipping address said “Bob, Porridgeville, Indiana” then it could be claimed that Bob was acting alone.
What happens when companies vanish? Like, if Donald Oats closes shop, and doesn’t renew his business registration, are the creditors SOL or can they still chase Mr. Oats as the proprietor of the now-defunct business (assuming it wasn’t incorporated)?
If the company is a sole proprietorship, there is nothing to disappear. The sole proprietor is liable on his contracts, even if they were made by an agent.
If it’s a corporation or an LLC, the debt dies with the entity. Many creditors will require principals to sign personal guarantees, just to avoid this result.
If it’s a partnership, the partners usually remain liable for the partnership’s debts.
It’s also why wholesale suppliers generally don’t let you buy unlimited quantities to begin with, and why they will usually develop a long-term relationship before offering credit.