Understand: Suing A Dissolved Corporation
Corporations, just like everything else, have an end to their days. Many corporations close for numerous reasons, and for the most part, it is due to their economic standing. A corporation may close due to bankruptcy and overwhelming debt, and often people sue for these debts.
Closing down a business may only limit their newly formed obligation, however, the law does not protect the business owners who have existing legal obligations prior to closing their business.
If you’re a businessman looking to sue a dissolved corporation, you have come to the right place.
In this website, our article will teach you under what circumstance you can file a legal action against dissolved corporations.
Before we begin, it is with utmost importance to keep in mind that this is no easy task since a dissolved corporation is essentially protected by the law.
If they have followed every step to prevent a lawsuit, they will not be able to get sued.
However, a dissolved corporation notwithstanding legally existing, therefore suing them may still be possible depending on the conditions as dissolving a corporation is merely just the first step on closing the business.
A dissolved corporation is still considered as a legal entity, meaning the liability for business owners nevertheless remains the same.
The second step would be winding-up the dissolved corporation. Businesses who undergo closure are under the obligation to pay their creditors before they are allowed to distribute their assets among the owners.
If the owners are found to be diverting assets to intentionally avoid paying the creditors on what is owed, it can lead to a lawsuit for fraudulent conveyancing.
Corporations who are undergoing the winding-up phase require full reconciliation by the legal proprietors for any financial claims which are being made against the company.
If the owner refuses to address these claims during the winding-up phase, the owner will risk facing legal backlash on valid grounds under personal liability in lieu of under the company’s title.
Legal proprietors who are unable to pay off their debts will be rendered as insolvent, which further contributes to the large risk of someone filing a lawsuit for fiduciary liability as they have failed to abide by the duty of care that is being owed to the creditors as they proceed with the winding-up phase of the corporation.
The final step would be to close the corporation, which cancels the corporation’s existence as well as any prior legal protections that the corporation has offered.
Upon completion of closing the corporation, any legal claims made against the company will fall directly to the owners. Owners will be especially more prone and vulnerable if any missteps were found throughout the entire procedure.
Different Scenarios Where Your Corporation Can Be Sued
As a legal proprietor who is going through dissolvement, you may be sued on various occasions depending on the events of your current situation.
Most legal claims will only last for a maximum of three years, but it is very well recommended that you check with your secretary of state and retain all the necessary documents for at least the three year period.
If someone files a lawsuit against the corporation after that period, the case will immediately be thrown out.
Below are a few viable circumstances that you may find yourself in as a business owner who’ll have a dissolved corporation.
- A company with outstanding debts from creditors. As mentioned above, your corporation must pay all outstanding debts during the winding-up phase before splitting assets between the owners in order to avoid any legal issues arising from this phase.
- A company who has committed fraudulent conveyances under bad faith. Companies who have diverted assets to owners or any insiders of the corporation will be considered as a corporation which has committed fraudulent conveyancing, as it is mandatory that all assets will first be used to pay creditors before the distribution of assets.
- A company in breach of fiduciary duty. A corporation will be in breach of fiduciary duty if the directors and managers of the corporation did not fulfill the requirement of the duty of care owed by the owners to the creditors. Owners are required to take the proper and necessary steps to protect the claims by the creditors during the winding-up period.
- Internal disputes by members of the board or partners. Partners or members of the board may file a lawsuit if they believe that there were claims of fraud or misuse of funds during the entirety of the corporation, regardless of any rights reserved.
Individuals may file a lawsuit for improper procedures. Owners are vulnerable to a lawsuit if they have failed to follow the procedures and steps necessary to close their corporation.
If these do not fit your current circumstances or situation, you’re most probably looking to sue a company that has already dissolved.
Which brings us to the next part of the article, can you sue a dissolved corporation?
When you have a fully dissolved corporation, it means that the company has completely ceased to exist.
Thus, action cannot be brought upon the dissolved corporation as it is no longer an entity available to be filed against.
The question of whether it is feasible or not to sue a dissolved corporation then becomes a question of how a party can bring legal actions against a dissolved corporation.
To do so, it is necessary to determine why the dissolved corporation happened in the first place. One of the most common reasons for a corporation to be dissolved is because of the low cash flow of that specific corporation, rendering them unable to continue their business.
Entrepreneurs who do so are voluntarily and are usually trying to minimize the debt owed instead of running the business with increasing debt.
A shareholder or partner who has died without a successor taking over the company will also lead to the dissolution of a corporation.
Furthermore, a corporation may also dissolve through liquidation by court order under several different circumstances.
The dissolution of a corporation by the court can typically arise on any of the following grounds:
- When a partner has become of unsound mind. To put it in layman terms, it is when a partner has been deemed ‘insane’ or not in the right state of mind. However, the insanity of a partner will not act as the sole reason for the dissolution of the corporation. The partners are required to file a suit for dissolution and prove in court that the acting director is not in the right state of mind. Only after fulfilling these acts, it will become a dissolved corporation.
- Permanent incapacity of the directing partner. A partner who has become permanently incapable of conducting their duties as a working partner either by mental or physical disabilities will render their corporation as a dissolved corporation.
- Breach of contract under a partnership agreement. A partner who breaches the partnership agreement willfully in relation to management affairs of the corporation may lead to other partners filing a lawsuit against the breaching partner. This will allow the corporation to be dissolved.
- Unlawful conduct of the corporation. If the partners of the corporation have been found to conduct their business in an unlawful manner, a dissolution will be carried forward by the court.
With that in mind, once the reason for the dissolution of the corporation is determined, the next step would be to restore the dissolved corporation.
As stated above, a dissolved corporation ceases to exist, therefore, restoring the corporation will bring it back to the state before the dissolution of the company.
If the court is satisfied that at the time it was struck off the company was carrying on standard operations, it may order that the company be added back to the registry and all personnel be restored to their same positions, as if the company had never been struck off.
The legislation states that when a company is dissolved there is a statute of limitations, that is the time limit of two years from the date of dissolution during which the court may at any time within two years of the date of dissolution.
Upon an application by the company’s liquidator or any other interested person, issue an order, with such terms as the court sees fit, declaring the dissolution void.
Thereupon, such proceedings may take place as might have taken place if the company had not been dissolved.
Is It Really Worth the Effort of Suing a Dissolved Corporation?
Suing dissolved corporations is definitely doable, however, it would be pointless if there are no remaining assets left of the corporation to go after.
Corporations who dissolve because they were bankrupt would probably lead you to achieve nothing as there isn’t any money left to sue for.
However, even if the corporation that you’re planning to file a lawsuit against did not dissolve due to bankruptcy, these said assets are most likely to have already been distributed to first the creditors and then the shareholders.
If the funds have already been distributed towards the shareholders, it would mean that there will be no funds or assets left for the claimant.
If you’re insisting on looking to claim for damages, you may in certain and extremely rare circumstances sue the individual owner or shareholder alternatively.
Claimants who are looking to bring action and sue shareholders would typically look for an officer of the board of the dissolved corporation.
However, this may be a little tricky as for a lawsuit to pierce the corporate veil would mean that the burden of proof would be on the claimant’s side (the party who sued).
This would mean that the claimant must prove that the shareholder was indeed guilty of some sort of wrongdoing in order to successfully sue that person.
In conclusion, individual shareholders and owners will be vulnerable to a lawsuit if the corporate veil has been pierced.
A corporation with pending lawsuits or with records of malpractice and power abuse would most likely have themselves in a bad position due to their bad reputation towards cooperating with the secretary of state.
Although piercing the veil for an individual to be sued remains as a valid option, it is important to note that this still remains as a very tricky and hectic option to take.
Should Someone Be Hired to Dissolve Your Corporation
If you’re a legal proprietor looking to dissolve your corporation, and wondering if there would be any legal liabilities which may or may not arise, it is a great option to hire someone to dissolve your corporation for you.
The dissolution process for your corporation is a tad bit too complicated for someone without experience.
It would be a very wonderful option to hire a lawyer to handle the dissolution for you, but attorney fees may be a little too expensive for someone who is looking to minimize their cost during a dissolution.
If you are looking to close your corporation at a minimal price, we definitely recommend ZenBusiness as one of our favourite and top pick companies who provide these services.
ZenBusiness offers services from business formation services and also business dissolution services. ZenBusiness offers great customer service as well as great customer feedback.
There are hundreds, if not thousands of reviews from all over the web. When it comes to quality and certainty, ZenBusiness offers these amazing qualities while delivering their certified documents to your doorstep or via digital files.
If you’re looking to lessen the burden that you have on your shoulders, we would highly recommend their services, and nothing is going to change our perception towards this amazing company.
Suing a dissolved corporation is possible, but if there are no remaining assets, then it is not really worth suing the company over.
Dissolved corporations generally stop their grounds of operation due to bankruptcy, and once a dissolved corporation has declared bankruptcy, there are literally no strong reasons in suing the dissolved corporation over.
However, take for say the corporation did not dissolve due to bankruptcy, the assets likely have already been distributed to the shareholders by the time a lawsuit gets to court, so the funds of the dissolved corporation you were after may no longer be available to attain.
In some cases, the individual shareholder may be sued instead of the dissolved corporation.
Typically, the shareholder to be sued is the director of the board of the dissolved corporation.
But for a lawsuit to pierce the veil and make that individual liable for the losses, the shareholder sued from the dissolved corporation in particular has to be found guilty in other wrongdoings.
Though it may be awkward and difficult, it is the more common way of getting a financial settlement from a dissolved corporation.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.