Shareholders of a closely held corporation may decide that it is time for the corporation to cease doing business. This decision may occur when the assets are sold to another company, or when the shareholders wish to retire. In these circumstances, there may be cash for distribution to the shareholders, but unknown claims or unliquidated claims against the corporation. The directors may face personal liability if cash is distributed to shareholders without leaving enough money to satisfy all of the creditors.
California law provides for a court supervised winding up that greatly reduces the risk of director or shareholder liability. When a corporation is voluntarily winding up, the Superior Court for the county in which the corporation is located may take jurisdiction over the winding up. The court has the power to settle outstanding claims against the corporation.
Once the court assumes jurisdiction, it may make any orders concerning the winding up of corporate affairs required by justice and equity. The court issues an order regarding notice to creditors, and no distribution of assets may be made until after the time (established by the court) for presentation of claims against the corporation.
The court supervising the windup may:
a. Require creditors to submit “proof of all claims and demands against the corporation, whether due or not yet due, contingent or unliquidated” and barring claims of those who fail to present their claims in compliance with the court’s order. The court sets a deadline, not less than four months, nor more than six months after first publication of notice to creditors for the submission of claims;
b. Determine claims against the corporation and determine the amount of money or assets required to pay for claims; and
c. Settle the corporation’s final accounts, including distribution of remaining money to the shareholders, and discharge directors from their duties and liabilities.
Once all of the claims have been determined and the accounts finally settled, the court issues a final order declaring that the corporation has been duly wound up, that debts and liabilities have been adequately provided for, that all known assets have been distributed, that the corporation is dissolved, that the corporate existence shall cease, and that the directors are discharged from their duties and liabilities.
The information contained in this blog is provided for informational purposes only. It is not legal advice and should not be construed as providing legal advice.