As discussed in our article on dissolving corporations, a California corporation may be dissolved upon either agreement of the owners or by a petition filed with the Court forcing the dissolution upon the entity.
Assume that after dissolution a liability arises or is pursued. Is the creditor or claimant without effective relief? What is the exposure of the shareholders, directors or owners of the now dissolved company? The answer is that some liability does attach with various limits to the liability imposed by law. This article shall outline the essential law on this topic.
The Basic Law:
Shareholders are liable to creditors and claimants of the now dissolved corporation up to the amount of assets distributed to the shareholder upon the dissolution of the corporation.
a. Post-dissolution lawsuits against corporation
Lawsuits may be filed and served against a dissolved corporation whether the cause of action arose before or after dissolution. California Code of Civil Procedure section 416.20; Corporations Code section 2011(a)(1). “[T]he corporation remains liable to the extent of its undistributed assets, including any available insurance. (Claims exceeding the corporation's undistributed assets may be enforced against the shareholders to the extent they receive liquidation distributions; see ¶8:1008 ff.)” Cal. Prac. Guide Corps. Ch. 8-E.
The power of a dissolved corporation to defend and prosecute claims continues to the extent necessary to wind up its affairs. California Corporations Code section 2010(a).
The summons and complaint can be served on any officer, director, or person having charge of its assets or an agent of process. If none of the foregoing can be found, the summons can be delivered upon the secretary of state. California Corporations Code section 2011(b).
b. Shareholder liability
“The shareholders of a dissolved corporation do not cease to exist as shareholders, nor do they lose all interest in, or responsibility for, the affairs of the corporation upon dissolution.” Favila v. Katten Muchin Rosenman LLP (2010) 188 Cal.App.4th 189, 213. Shareholders may be liable for claims against a dissolved corporation whether arising before or after dissolution. California Corp. Code section 2011(a)(1)(B). However, there are certain limits placed on shareholder liability with respect to (1) the amount recoverable and also, (2) the duration of liability.
1. Shareholders’ post-dissolution liability is limited to the total amount of assets distributed to the shareholder or their pro rata share of the claim – whichever is less.
If any of the assets of the dissolved corporation have been distributed to shareholders, against shareholders of the dissolved corporation to the extent of their pro rata share of the claim or to the extent of the corporate assets distributed to them upon dissolution of the corporation, whichever is less. A shareholder's total liability under this section may not exceed the total amount of assets of the dissolved corporation distributed to the shareholder upon dissolution of the corporation. Id.
2. All causes of action against shareholders are “extinguished unless the claimant commences a proceeding to enforce the cause of action against that shareholder of a dissolved corporation prior to the earlier of the following”:
(1) the expiration of the statute of limitations; or
(2) four years after the effect date of the dissolution of the corporation.
California Corporations Code section 2011(a)(2). If there is any doubt as to the timing of the dissolution of RFC, we can obtain the specific date of dissolution if we request a status report with history (“with history” needs to be hand written on the request) from the secretary of state. This will cost $4.00 and we will simply need to fill out a form and mail it in.
A recent California court decision found that even if the corporation is not formally dissolved but has only ceased business and functionally dissolved, “a cause of action under section 2011 may lie against the shareholders of a corporation that is dissolved “de facto.” Pension Plan for Pension Trust Fund for Operating Engineers v. Giacalone Electrical Services, Inc (N.D. Cal., June 29, 2015, 13-CV-02338-SI) 2015 WL 3956143, at *8.
Those planning to dissolve their corporation or even simply planning to walk away from the shell must realize that liability may attach unless carefully planned. And creditors, looking at a defunct corporation, should not assume no relief is available until they investigate what happened to the assets and what liabilities were known by the owners when they closed the doors.