Delaware Dissolution Procedures: The Extent Of Potential Director Liability

PF
Pierson Ferdinand LLP

Contributor

Pierson Ferdinand strives to provide excellent legal counsel and representation to clients worldwide from 20+ key markets in the US and UK. We specialize in handling complex legal matters and providing solutions to our clients' most pressing needs. Our lawyers come from top global law firms, including Am Law-ranked, regional and boutique law firms, federal and state government careers, and senior in-house counsel roles.
Section 281(b) of the Delaware General Corporation Law makes clear that as to future claims, the dissolved corporation shall adopt a plan of distribution.
United States Corporate/Commercial Law

Section 281(b) of the Delaware General Corporation Law (the "DGCL") makes clear that as to future claims, the dissolved corporation shall adopt a plan of distribution pursuant to which the corporation "shall make such provision as will be reasonably likely to be sufficient to provide compensation". 8 Del. C. § 281(b). Moreover, Section 281(c) indicates that directors who comply with the provisions of either the default or elective procedure shall not be personally liable to the claimants of the dissolved corporation. See 8 Del. C. § 281(c).

Accordingly, if a dissolved corporation fails to comport with the requirement of Section 281(b) by not making such provision as will be reasonably likely to be sufficient, then the director could be personally liable for the difference between the amount which was made available, and the amount determined by the Court to be "reasonably likely to be sufficient.

No Delaware decision to date has addressed whether director liability resulting from a failure to provide assets "reasonably likely to be sufficient", in connection with the default dissolution procedure of the DGCL, would be capped by the value of the assets distributable at the time of dissolution of the company. However, because Section 281(b) of the DGCL contemplates that a dissolving company with insufficient assets may pay its creditors according to their priority, and ratably among claims of equal priority, it may be possible that director liability under the default dissolution procedure could be capped by the amount of assets available to be distributed. See 8 Del. C. § 281(b); see also In re RegO Co., 623 A.2d 92, 106 (Del. Ch. 1992) ("Section 281(b) must mean that a corporation in dissolution which cannot both pay its present creditors and make adequate provision for contingent and future claims, and which follows the Section 281(b) procedure, is directed not to pay its current creditors in full but to pay them ratably.").

This potential capping of liability, however, would likely not extend to liability relating to fraudulent and/or unlawful transfers made by the dissolving company prior to dissolution, pre-dissolution breaches of fiduciary duties of such directors, or any other liability not associated with the dissolution of the company pursuant to Section 281(b).

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.

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More