Chapter 14 – Termination of Corporate Existence

Corporate Dissolution

• Dissolution:  Termination of the legal status of an entity. 
• Voluntary dissolution:  dissolution initiated by a corporation’s directors or shareholders
• Involuntary dissolution:  dissolution against the will of a corporation, initiated by state, shareholders, or creditors (also called judicial dissolution)
• Administrative dissolution:  a dissolution initiated for technical or administrative defaults, such as failing to file reports or pay taxes

Articles of Dissolution

• Articles of dissolution:  final document filed with state effecting termination of an entity (also called certificate of dissolution)
• Articles generally set forth the following:
  • Name of the corporation
  • Date dissolution was authorized
  • That the dissolution was approved by the requisite shareholder vote (or that the corporation has not issued shares and therefore it is being dissolved by the incorporators)

Articles of Dissolution

• In some states:
  • That all debts, obligations, and liabilities of the corporation have been paid or discharged or adequate provision has been made therefore; and
  • That the corporate assets have been distributed to the persons entitled thereto

Involuntary dissolution

• Dissolution against the will of a corporation, initiated by state, shareholders, or creditors and brought before court

Reinstatement

• Process of reviving a corporation dissolved for administrative reasons

Liquidation

• Liquidation:  process of collecting assets, paying debts, and distributing remains to business owners (also called winding up)
  • Collecting assets
  • Disposing of properties that will not be distributed to shareholders
  • Discharging liabilities or making provisions for discharging liabilities
  • Distributing the remaining property to the shareholders according to their respective interests

Key Features of Corporate Dissolution and Liquidation

• Corporations can dissolve voluntarily, administratively,  or involuntarily/judicially.
• Dissolution refers to termination of the corporate entity, while liquidation refers to termination of the corporation’s business and affairs.
• If dissolution is voluntary, articles of dissolution will be filed with the state.  If dissolution is involuntary, a court will enter a decree of dissolution.
• An administrative dissolution may be initiated by the state for technical reasons.  A corporation that is dissolved for such reasons can generally apply to be reinstated.
• An involuntary dissolution may be initiated by the state if the corporation exceeds state authority or has procured its articles through fraud.  Reinstatement is not generally permissible in such an event.
• Shareholders may initiate a dissolution, often because of director misconduct.  In lieu of ordering a dissolution, a court may allow the complaining shareholder’s shares to be purchased.
• Creditors may initiate a dissolution if the corporation is insolvent and their claim is undisputed. 
• If dissolution is voluntary, corporate management will supervise liquidation; if dissolution is involuntary, a court will supervise liquidation.
• Corporations must generally notify known claimants and instruct them to submit their claims against the corporation within a certain period of time or be barred thereafter.  As to unknown claims, corporations generally publish a notice in a newspaper, and claimants can enforce the claim within three years thereafter.
• During liquidation, the expenses of liquidation will be paid, creditors will be paid, and then remaining assets will be distributed to shareholders on a pro rata basis in accordance with any preferences.