The Corporate Transparency Act's (CTA) reporting requirements became effective January 1, 2024. The act places substantial compliance responsibilities on numerous U.S. and foreign business entities.
The purpose of the CTA is to combat unlawful activities such as money laundering and tax evasion by collecting additional details about the ownership of specific entities operating in or engaging with the U.S. market.
The application of the CTA in corporate bankruptcies has already led to uncertainty that will require further clarification. A key concern is whether a bankruptcy trustee appointed in Chapter 7 or other cases is subject to the CTA’s beneficial ownership information (BOI) reporting requirements.
In this article, we explain what beneficial ownership is and the reporting implications for bankruptcy cases.
Determining beneficial ownership filing requirements
A BOI report must be filed with FinCEN by any corporation, LLC, or other entity that meets the definition of a “reporting company” – unless that entity qualifies for an exemption.
CTA BOI filing requirements include:
- Filing an initial report that includes information about the company and its beneficial owners. For domestic reporting companies formed on or after January 1, 2024, and foreign reporting companies registered to do business in the U.S. on or after that date, the report must also include details about the company applicant.
- Submitting updates to FinCEN within 30 calendar days whenever there are changes to previously reported information about the company or its beneficial owners. A beneficial owner is an individual who, directly or indirectly, exercises substantial control over the reporting company, or owns or controls a minimum of 25% of the company’s ownership interests.
Can a trustee exercise substantial control over a reporting company?
A trustee or trust may exercise substantial control over a reporting company. Per the CTA: “An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:
- Board representation.
- Ownership or control of a majority of the voting power or voting rights of the reporting company.
- Rights associated with any financing arrangement or interest in a company.
- Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company.
- Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees.
- any other contract, arrangement, understanding, relationship, or otherwise.”
Case study: Boa Nutrition, Inc.
Two motions were recently filed in bankruptcy proceedings to confirm that Chapter 7 trustees are not subject to the CTA.
One involved the trustee for YLG Partners Inc, who filed a motion with the U.S. Bankruptcy Court for the Middle District of North Carolina. The other pertained to BOA Nutrition, Inc. in the U.S. Bankruptcy Court for the Eastern District of North Carolina.
In both cases, the debtor was a North Carolina corporation and otherwise qualified as a reporting company under the CTA. The trustee in both cases filed a motion seeking an order determining that the trustee was not obligated to comply with the CTA. FinCEN filed substantially similar reply briefs in both cases.
FinCEN clarified the definition of "senior officer" for a reporting company, stating that a Chapter 7 trustee of a bankruptcy estate does not fall under this category. While FinCEN agreed with the conclusion of the bankruptcy administrator, it emphasized that Chapter 7 trustees could still be held liable for a Chapter 7 debtor's failure to report under the CTA in exceptional circumstances, such as if the trustee prevented the debtor from reporting or falsely assured the debtor that reporting would be taken care of.
FinCEN's responses in the North Carolina cases also noted that it anticipates "issuing official guidance consistent with this response to provide clarity for Chapter 7 trustees more generally."
As of September 11, 2024, FinCEN has not issued an FAQ regarding the case or the trustee’s obligation under the CTA. Further clarification is needed on bankrupt entities and the issue of substantial control.
Bankruptcy administrators should check the FinCEN website for further updates about whether Chapter 7 trustees are held liable for a debtor’s failure to report BOI.
Learn more
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Others in the series:
Corporate Transparency Act: Best practices for beneficial ownership information reporting
Corporate Transparency Act: Ongoing compliance for reporting companies
Corporate Transparency Act: Considerations for joint ventures