Under the statutory dissolution scheme in Delaware, corporations
have two options to wind up and liquidate their assets: through the
"elective" or "default" dissolution
procedures. These are also referred to as the
"judicial" and "extrajudicial"
procedures. The elective procedure is codified under 8 Del. C. § 280 and 281(a), while
the default procedure is codified under 8 Del. C. § 281(b).
Comparison of the Elective and Default Dissolution
The elective and default procedures are very different.
Under the former, a corporation must petition the Court for
approval of the security set aside, and provide notice of
dissolution to potential claimants. Under the default
procedure, the corporation does not petition the Court for review
of its plan and security, but instead must adopt a plan of
distribution through which, among other things, the corporation
"shall make such provision as will be reasonably likely to be
sufficient to provide compensation" for pending claims and
future claims (claims that are likely to arise or become known
within 10 years after the date of dissolution). 8 Del.
C. § 281(b). The following is a link to a prior
post dated September 30, 2013 discussing these dissolution
Dissolution and Winding-Up of Delaware Corporations, (Part
Potential Limitation for Director Liability
One implication of following either the elective or default
dissolution procedures is the potential for director
liability. Under either the default or elective procedure,
the potential liability of directors of the dissolved corporation
will be limited if the procedures are properly followed.
See 8 Del. C. § 281(c) (providing that
directors of a dissolved corporation will not be personally liable
to the claimants of the dissolved corporation if the corporation
has complied with either the elective or default procedure).
However, directors choosing to follow the elective procedure will
receive the Court's stamp of approval through its determination
of adequate security.
On the other hand, directors who have chosen the default
dissolution procedure will remain subject to claims in the future
that they have not adequately complied with Section 281(b)'s
requirement of "reasonableness". Accordingly,
following the default procedure may provide a lesser degree of
protection to a dissolved corporation's directors.
See In the Matter of Krafft-Murphy Co., Inc., C.A. No. 6049-VCP (Del. Ch. Feb. 4, 2013)
("reliance upon the mechanism of Section 281(b) may present a
risky situation for corporate directors regardless of their good
faith and due care.").
Following articles will discuss the extent of potential
liability for a director of a corporation following the default
dissolution procedure that has not set aside adequate security for
pending of future claims.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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