Corporation Not Entitled to Hide Behind Indemnification Agreement Between Shareholders

HNWBusiness and Corporate Legal Services, Business Law

By Fredrick P. Niemann, Esq., a NJ Corporate Attorney

 Sometimes shareholders of New Jersey Corporation may agree to an indemnification agreement, an indemnification agreement is where one shareholder promises to pay all liabilities of the other shareholder with respect to the corporation. In these instances, if the corporation incurs a debt, it will be the one shareholder’s responsibility to pay the debt, regardless of the fact that he is not the only one who owns a piece of the company.
 The NJ Courts recently heard a case involving such an agreement. The only two shareholders of the NJ Corporation agreed to an indemnification agreement, making one shareholder solely responsible for all money owed by the business. When the corporation dissolved, one of the shareholders was forced to personally satisfy some of the corporations’ debts to creditors. This shareholder, seeking reimbursement, mistakenly filed a lawsuit against only the corporation itself, however, and not the other shareholder. The trial court judge erroneously cited the indemnification agreement between the two parties as a reason to dismiss the case, finding that the corporation was indemnified of all debts. The NJ Appellate Court disagreed, however, remanding the case and stating that the corporation itself was not entitled to hide behind the indemnification agreement between two of it’s shareholders. Since the corporation was not a party to the indemnification agreement, it would be held liable for all legitimate debts owed to creditors.

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