Do I need to return money to a partner of company that went bankrupt?

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Do I need to return money to a partner of company that went bankrupt?

My partner and I started a small company last year. I own 40% of the initial stocks and my partner owns 60% during the start up of the company and filing to Security and Exchange Commission. Then we need to raise capital for the company. During the raising of capital I don’t have money so I told my partner, if he has money then continue using it as I don’t have money during that time. However, after a year, which is right now, the company didnt went well. It goes to bankruptcy. My partner is asking me to return 40% of his money to cover up his expense. Do I need to pay money to him?

Asked on June 20, 2012 under Business Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

There is no specific legal requirement to return a failed investment to a business partner and, after all, that's the risk that any business partner or investor takes: that the business will not work out and the investment fail.

If there was some agreement or contract between the two of you that you would return the money, then you would have to; or if the money  had been in the form of a loan, not an investment, you'd need to repay it per the terms of the loan; or possibly if you defrauded your partner (e.g. lied to him about the costs or prospects, to get him to invest), he may have grounds to sue you for fraud.

Also, if you have actually filed bankruptcy, then whatever obligation you might otherwise have had under a loan or other agreement will be modified by the bankruptcy court.


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