COVID 19- A Pressure Cooker for Your Small Businesses
Even during normal non-pandemic times, we see a lot of business disputes arising from one partner/member/shareholder (“partner”) violating their agreements, and duties to their partners. The vast majority of these matters arise because one person was under unusual stress, sometimes having nothing whatsoever to do with the business itself. Instead, the problems usually start as personal and bleed over into the business.
COVID 19 drastically increases the pressure on small businesses and the owners of those businesses. Look behind any small business – whether a store, a service provider, a non-essential medical practice, or a startup tech company- shuttered by government mandate with no or reduced revenue, and you will find owners struggling to feed their families and keep their homes. COVID 19 turned up the heat on the already pressure cooker like experience of running a small business and thereby increased the likelihood of internal problems.
From the wrongdoer’s perspective, just one personal mortgage payment from the business account could delay foreclosure/eviction, or one grocery charge on the company credit card will keep the family fed. When all the owners agree to these unusual accommodations there is no real problem. But, when these forays are taken without permission or even notice to the other owners, it is the beginning of real trouble. Once the initial step is taken, rationalization and self-preservation often cause the bad actor to dig in and defend conduct that just a few months ago would have been indefensible in their own minds.
Various government agencies are now warning against heightened risk of fraud during the COVID 19 emergency. For example, the Dekalb County District Attorney Sherry Boston is warning against an increased risk of investment and lottery scams. Similarly, the FBI is warning about a wide range of scams and crimes likely to increase during the COVID 19 outbreak and lockdown.
Although the governments’ warnings concern outside criminals, the same increase in personal stress that leads criminals to take advantage of trying times can also tempt typically honest partners to questionable conduct. Although most of these start small, many evolve into substantial misuse of corporate assets, embezzlement, and even theft of entire businesses through lockout of other business partners.
Misuse of business assets, embezzlement, and even outright theft of businesses are not practically difficult when the businesses lack adequate operational security and accounting practices. For example, when each partner is allowed unfettered access to bank accounts, then the entire balance is at risk. Our experience is that a partner does not simply take the entire balance of a bank account and flee. Instead, it usually begins small and progresses. Accordingly, regular financial reports and bank statements reconciliation is critical for prevention and early detection.
Fried Bonder White attorneys can help guide with easy preventative practices and, if wrongdoing is suspected, enforce your rights.