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Part IV: Sale or Liquidation of a Corporation

13S

Corporate Aspects of Dissolution

KEITH H. BEAK STEVEN M. SCHOLL

Horwood, Marcus & Berk, Chtd. Chicago

OCopyright 1999 by Keith H. Berk and Steven M. Scholl.

13S-1

Closely Held Corporations - Supplement

II. Voluntary Dissolution

B. Dissolution by the Shareholders

3. [13S.9] Notice Requirements

F. Winding Up

4. [13S.17] Survival of Claims

5. [13S.18] Claims by Former Shareholders in Their Individual Capacities

6. Obligations to Third Parties

b. [13S.20] Liability of Directors

III. Involuntary Dissolution

A. Administrative Dissolution

3. [13S.29] Effect of Reinstatement

B. Judicial Dissolution

1. [13S.30] Statutory Grounds

3. [13S.32] Action by Creditor (Insolvency)

4. Actions by Shareholders

a. [13S.33] Generally

b. [13S.34] Director Deadlock

c. [13S.35] Oppression

5. Alternative Remedies to Dissolution


b. [13S.37] Appointment of Provisional Director or Custodian

(2) [13S.39] Custodian

(3) [13S.40] Term

c. [13S.41] Purchase of Shareholder’s Shares

(1) [13S.42] Upon motion of complaining shareholder

(2) [13S.43] Upon motion of corporation or other shareholders

(3) [13S.44] Fair value

d. [13S.45] Attorneys’ Fees

6. Procedure for Judicial Dissolution

b. [13S.47] Parties

e. [13S.50] Reporting Requirements, Liability, and Compensation

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Corporate Aspects of Dissolution 13S.18

II. VOLUNTARY DISSOLUTION


3. [13S.9 ] Notice Requirements

The BCA citation is revised:

BCA §12.l5(b), 7.15.

F. Winding Up

4. 113S.171 Survival of Claims

Add at the end of the second paragraph:

In Federal Deposit Insurance Corp. v. Meyer, 197 B.R. 277 (N.D.Ill. 1996), an officer and guarantor, of a defaulted corporate loan tried to avert liability by asserting that the corporation’s debts "came due" after its dissolution. The court cited Blankenship in holding that the guarantor failed to show that the creditor’s claim against him as guarantor of the loan accrued after the corporation was dissolved. 197 B.R. at 282.

The first two sentences in the third paragraph are revised:

With few exceptions, the five-year survival period is strictly enforced. Even a cause of action based on a defendant’s fraudulent actions is insufficient to extend the time limit for bringing suit.

Add at the end of the section:

Illinois courts have recognized a few exceptions to the survival period. Pehr v. Metz, Train & Youngren, Inc., 274 IlI.App.3d 218, 653 N.E.2d 766, 210 Ill.Dec. 571 (1st Dist. 1995); Edwards v. Chicago & Northwestern Ry., 79 111.App.2d 48, 223 N.E.2d 163 (4th Dist. 1967). In Pehr, plaintiff filed a personal injury suit against the dissolved corporation within the five-year survival period but later voluntarily dismissed the suit. The plaintiff then refiled the suit less than a year later but after the expiration of the five-year survival period. The court allowed the suit by holding that pursuant to § 13-217 of the Code of Civil Procedure, 735 ILCS 5/13-217, a voluntarily dismissed action may be refiled within the greater of one year or the expiration of the survival period if the original suit was filed within the original survival period. 653 N.E.2d at 767. In Edwards, the court allowed a lawsuit against the dissolved corporation even though the survival period had lapsed because the defendants had made false statements "with the intent to defraud the plaintiffs and to induce them to refrain from filing suits prior to the end of the period for initiating suits against [defendants]." 223 N.E.2d at 164.

5. [13S.181 Claims by Former Shareholders in Their Individual Capacities

Add after the Lake County Trust citation in the JIrst full paragraph on p. 13-11:

Hunter v. Old Ben Coal Co., 844 F.2d 428 (7th Cir. 1988) (claims of former shareholders who were third-party beneficiaries under contracts with dissolved defendant corporation were individual claims and thus not barred by survival statute);

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13S.20

Closely Held Corporations Supplement


b. [13S.20] Liability of Directors

Add at the end of the fifth paragraph:

If directors carry on a dissolved corporation’s business illegally after its dissolution, they will not be held liable for post-dissolution judgments arising out of debts or liabilities incurred prior to dissolution unless the directors wrongfully retained or disposed of corporate assets after dissolution. Mid-American Elevator Co. v. Norcon, Inc., 287 Ill.App.3d 582, 679 N.E.2d 387, 223 Ill.Dec. 202 (1st Dist. 1996).

III. INVOLUNTARY DISSOLUTION


3. [13S.291 Effect of Reinstatement

Add at the end of the third paragraph on p. 13-18:

Chicago Tile Institute Welfare Fund v. Hermansen, No. 94 C 7216, 1996 WL 131800 (N.D.111. Mar. 21, 1996) (text available in WESTLAW).


1. [13S.30] Statutory Grounds

Add at the end of the carryover paragraph at the top ofp. 13-19:

BCA § 12.56.

The BCA citation at the end of the last paragraph is revised:

E3CA §12.56.

3. 113S.321 Action by Creditor (Insolvency)


BCA §12.50(a)(2).




BCA §12.56(a).

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b. [13S.34] Director Deadlock

Throughout the section, all references to "§ 12.50(b)" and "§ 12.50(b)(1)" should read "§ 1 2.56(a)( 1)."

Add at the end of the third paragraph:

Similarly, in Allen v. Park National Bank & Trust of Chicago, No. 96 C 2198, 1998 WL 299477 (N.D.11l. May 29, 1998) (text available in WESTLAW), two directors and equal shareholders of a holding company owning 83.16 percent of a bank could not agree on how to vote the holding company’s shares with respect to electing directors of the bank. The holding company’s bylaws permitted the president (one of the directors and shareholders) to vote all of the holding company’s bank shares. The other director and shareholder filed an action in the Illinois circuit court for judicial dissolution alleging, among other counts, a directors’ deadlock. The Illinois circuit court action was settled pursuant to a settlement agreement. A subsequent action was filed in the district court regarding, in part, an interpretation of the settlement agreement. In its ruling, the district court opined that it was unlikely that the Illinois circuit court would have ruled that the elements of deadlock under §12.50(b)(l) had been proved. The court discussed that there was no evidence of irreparable harm and that the deadlock on the election of bank directors did not prevent "the corporation from being run to the general advantage of all the shareholders" because the conditions complained of were "temporary in nature or else. . . the result of joint action agreed to by the Bank directors." 1998 WL 299477 at *4�

The third sentence in the last paragraph is revised.

In the alternative, if a court does determine that a deadlock of some sort exists, the court may find an alternative remedy under § 12.56(b) of the BCA.

c. [13S.35] Oppression

The BCA citation in the first paragraph is revised:

BCA §12.56(a)(3).

Add at the bottom ofp. 13-21:

Although the district court in Allen v. Park National Bank & Trust of Chicago, No. 96 C 2198, 1998 WL 299477 (N.D.Ill. May 29, 1998) (text available in WESTLAW), did not think dissolution was warranted based on deadlock grounds under BCA §12.50(b)(1) (see §13S.34), it believed an Illinois circuit court would have found that the actions constituted oppression under BCA §12.50(b)(2). The court opined that although Allen (50-percent shareholder, director, and president of a holding company owning 83.16 percent of a bank) acted legally, he nevertheless acted oppressively towards the plaintiff (50-percent shareholder and director of holding company) by using his position to maintain control over selection of the board of directors of the bank, the single most important activity of the holding company. The district court believed that Allen’s actions deprived plaintiff of his right as majority shareholder of the bank to participate in the selection of the bank’s management in proportion to his shares of stock and constituted a "continuing course of conduct which is overbearing and heavy handed." 1998 WL 299477 at *5 Further, the district court explained that the Illinois circuit court could have caused the dissolution of the holding company, ordered the sale of plaintiff’s shares to Allen, ordered the sale of the holding company’s assets through a receivership, or ordered that each shareholder have the right to vote 50 percent of the holding company’s bank shares for director elections or other bank business.

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13S.36

Closely Held Corporations - Supplein en,



The heading and section are revised:

a. [13S.36] Nonpublic Corporations Generally

In either an action for judicial dissolution or an action that alleges the grounds for dissolution set forth in I3CA §12.56 but does not seek dissolution, the court may provide for one of the following remedies as an alternative to dismissing the action or ordering dissolution of a nonpublic corporation:

1. order the performance, prohibition, alteration, or setting aside of any action of the corporation or of its shareholders, directors, or officers;

2. cancel or alter any provision in the corporation’s articles of incorporation or bylaws;

3. remove any director or officer from office;

4. appoint any individual as a director or officer;

5. order an accounting with respect to any matter in dispute;

6. appoint a custodian;

7. appoint a provisional director;

8. order mediation or other form of nonbinding alternative dispute resolution;

9. order payment of dividends;

10. award damages to any aggrieved party;

11. order the purchase of the complaining shareholder’s shares. BCA § 12.56.

A party may seek an independent remedy under §12.56 without seeking dissolution. Kimmel v. Wirtz, 793 F.Supp. 818 (N.DJll. 1992); Schirmer v. Bear, 174 111.2d 63, 672 N.E.2d 1171, 220 lll.Dec. 159 (1996). In Schirmer, the court determined that plaintiff does not need to prove that the defendant’s wrongdoing was so severe to justify dissolution. The court found that once the predicate misconduct is established, the court may in its discretion determine which, if any, remedy is equitable and appropriate for plaintiff under the statute.

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b. [13S37] Appointment of Provisional Director or Custodian

The section is revised:

As an alternative remedy, the court may appoint a provisional director or a custodian if, in the court’s discretion, it appears such an action will remedy the grounds for dissolution alleged by the complaining shareholder under §12.56. BCA §12.56(b)(6), 12.56(b)(7). The court will allow the custodian reasonable compensation for services rendered and reimbursement or direct payment for reasonable costs and expenses from the assets of the corporation or the proceeds of sale of the assets. BCA §12.60(i).

(2) [13S.39] Custodian

The section is deleted.

(3) [13S.40] Term

The section is deleted.

c. [13S.41] Purchase of Shareholder Shares

The reference to "§ 12.50" in the first sentence should read "§ 12.56."

(1) [13S.42] Upon motion of complaining shareholder


BCA §12.56(b)(11), 12.56(e).

Add at the end of the section:

Take note that a plaintiff shareholder in a closely held corporation need not prove grounds that would justify dissolving the corporation as a prerequisite to receiving the statutory remedy of having the corporation purchase his shares. See Schirmer v. Bear, 174 I11.2d 63, 672 N.E.2d 1171, 220 lll.Dec. 159 (1996). The Illinois Supreme Court concluded that when a minority shareholder seeks relief from oppressive or illegal conduct on the part of majority shareholders or challenges misapplication or wasting of corporate assets, the minority shareholder must only establish that the majority shareholders engaged in the alleged misconduct. The shareholder need not prove that the wrongdoing was so severe that it would justify dissolving the corporation. Once the predicate conduct has been established, the court may in its discretion determine which, if any, remedy is available and appropriate. 672 N.E.2d at 1176. The court held that a trial court could order that the corporation pay the shareholder for his shares without also ordering dissolution of the corporation. 672 N.E.2d at 1177. The Schirmer court specifically overruled a ruling in Coduti v. Heliwig, 127 lll.App.3d 279, 469 N.E.2d 220, 82 Ill.Dec. 686 (1st Dist. 1984), which held that the remedy of a purchase of plaintiff’s shares could not be awarded unless the plaintiff proved all elements necessary to warrant dissolution.

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13S.43 Closely Field Corporations Supplement

(2) [13S.43] Upon motion of corporation or other shareholders

The section is revised:

BCA §12.56(f) governs the process of a privately held corporation’s election to purchase a complaining shareholder’s shares. The corporation or other shareholders have 90 days after the filing of a § 12.56 petition to elect to purchase all shares owned by the petitioning shareholder for their fair value. This election is irrevocable unless the court determines it would be equitable to set aside or modify the election. BCA §12.56(f)(1). The corporation is required to give written notice to all shareholders of the election, and all shareholders are given an opportunity to participate proprietarily in the election to purchase shares and must file a notice of their intention to join. BCA §12.56(f)(2). Once an election is filed, the proceeding may not be discontinued or settled unless the court determines such a disposition would be equitable. BCA §12.56(0(4). If the parties reach agreement as to the fair value and terms of purchase of the shares, the court shall enter an order directing the purchase on the parties’ terms and conditions. BCA §12.56(0(5). However, if the parties are not able to agree on value and terms of purchase, the court will determine the fair value of the petitioners’ shares pursuant to § 12.56(e).

(3) [13S.44] Fair value

The heading andfirst paragraph are revised:

(3) [13S.44] Fair value in a nonpublic corporation

In an action by a corporation or another shareholder seeking to buy out the complaining shareholder in a nonpublic corporation, the parties may first seek to reach an agreement as to the fair value of the shares. If within 30 days of the filing of the latest election to purchase the shares, the parties reach an agreement as to the fair value and terms of the purchase of the petitioning shareholder’s shares, the court will enter an order directing the purchase on the terms and conditions agreed to by the parties. BCA § 12.56(f)(5). However, if the parties are unable to reach an agreement as to the fair value of the shares, the court, upon application of any party, shall stay the proceeding and will determine the fair value of the shares pursuant to BCA §12.56(e).

BCA § 12.56(e) sets forth the procedure through which a court-ordered share purchase is effected. Section 12.56(e)(i) states that the court shall "[d]etermine the fair value of the shares, with or without the assistance of appraisers, taking into account any impact on the value of the shares resulting from the actions giving rise to a petition." Additionally, the court shall "[c]onsider any financial or legal constraints on the ability of the corporation or the purchasing shareholder to purchase the shares." BCA §12.56(e)(ii).

d. [13S.45] Attorneys ’ Fees

The first sentence and the BCA citation following are revised:

If the court determines that any party in an action for judicial dissolution has acted arbitrarily, vexatiously, or otherwise not in good faith, the court may, in its discretion, award attorneys’ fees and other reasonable expenses to the parties adversely affected by the action. BCA §12.60(j).

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Part IV: Sale or Liquidation of a Corporation


KEITH H. BERK STEVEN M SCHOLL

Horwood, Marcus & Braun, Chtd. Chicago

*Copyright 1996 by Keith H. Berk and Steven M. Scholl.

13-1

Closely Held Corporations

I. [13.1] Introduction

A. [13.21 Dissolution in General

B. [13.3] Dissolution Methods

IL Voluntary Dissolution

A. [13.4] Dissolution by the Incorporators


1. [13.5] By Unanimous Written Consent of Shareholders

2. [13.6] By Vote of Shareholders

a. [13.7] With Board Approval

b. [13.8] Without Board Approval

3. [13.9] Notice Requirements

4. [13.10] Vote Requirements

C. [13.111 Filings

D. [13.12] Withdraw from Doing Business in Other States

E. [13.13] Revocation of Voluntary Dissolution

F. Winding Up

1. [13.14] Effect of Dissolution 2. [13.15] Ceasing To Do Business

3. [13.16] Notice to Creditors

4. [13.171 Survival of Claims

5. [13.18] Claims by Former Shareholders in Their Individual Capacities


a. [13.19] Generally

b. [13.20] Liability of Directors

c. [13.21] Liability of Shareholders

G. Liquidation

1. [13.22] Executory Contracts

2. [13.23] In-Kind Distributions

H. [13.24] Dissenters’ Rights

I. [13.25] Plan of Liquidation and Dissolution

J. [13.26] Checklist for Voluntary Dissolution

III. Involuntary Dissolution


1. [13.27] Grounds

2. [13.281 Reinstatement

3. [13.291 Effect of Reinstatement

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1. [13.301 Statutory Grounds

2. [13.311 Action by Attorney General

3. [13.32] Action by Creditor (Insolvency)



b. [13.34] Director Deadlock

c. [13.35] Oppression



b. [13.37] Appointment of Provisional Director or Custodian

(1) [13.38] Provisional director

(2) [13.39] Custodian

(3) [13.40] Term

c. [13.41] Purchase of Shareholder’s Shares

(1) [13.42] Upon motion of complaining shareholder

(2) [13.43] Upon motion of corporation or other shareholders

(3) [13.44] Fair value

d. [13.45] Attorneys’ Fees


a. [13.46] Commencing the Action

b. [13.47] Parties

c. [13.48] Court Action

d. [13.49] Liquidating Receiver

e. [13.50] Reporting Requirements, Liability, and Compensation

IV. Appendix

A. [13.51] Articles of Dissolution B. [13.52] Sample Unanimous Written Consent of Shareholders

C. [13.53] Articles of Revocation of Dissolution

D. [13.54] Sample Notice to Known Creditors

E. [13.55] Sample Plan of Complete Dissolution and Liquidation F. [13.56] Application for Reinstatement

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13.1


I. [13.1] INTRODUCTION

An Illinois corporation derives its life and right to transact business from the State of Illinois in accordance with the Illinois Business Corporation Act of 1983 (BCA), 805 ILCS 5/1.01, et seq. Likewise, the manner in which an Illinois corporation is dissolved and liquidated, together with the rights of its shareholders and creditors, is governed by the BCA. Swager v. Couri, 77 I11.2d 173, 395 N.E.2d 921, 32 Il1.Dec. 540 (1979). The dissolution of an Illinois corporation can have no legal effect without strict compliance with the BCA. In re Wolf Manufacturing Industries, 56 F.2d 64 (7th Cir. 1932). Neither the BCA nor any court of the State of Illinois has the power to dissolve a corporation incorporated outside of Illinois.

This chapter focuses on the procedural requirements found in Article 12 of the BCA with respect to dissolving, winding up, and liquidating an Illinois closely held corporation. The aim here is to provide practical guidance as opposed to an exhaustive discussion of all issues. Sample forms are included in the Appendix. This chapter also focuses on the potential exposure to personal liability of the directors, officers, and shareholders upon dissolution of the closely held corporation and the statutory steps the corporation and the officers and directors should take to limit their exposure.

The shareholders of a closely held corporation often serve as directors and officers. In this circumstance, the shareholder wears multiple hats and must be careful to strictly comply with the BCA to avoid liability, even when no funds are distributed to the shareholder.

A. [13.2] Dissolution in General

The term "dissolution," while often used synonymously with such terms as "liquidation" and "winding up," has its own meaning and effect. Dissolution terminates the capacity of a corporation to act as such and necessitates the orderly winding up of its affairs and liquidation of its assets. Although the BCA itself does not actually define "dissolution," the provisions governing the effect of dissolution state that the "[d]issolution of a corporation terminates its corporate existence and [from that time on prevents the corporate entity from] carry[ing] on any business except that necessary to wind up and liquidate its business and affairs." BCA § 12.30. "Liquidation" and "winding up" are generally synonymous terms for the process of collecting all of a corporation’s assets, making provisions for payment to creditors, and distributing the remainder of the corporation’s assets to the shareholders.

B. [13.3] Dissolution Methods

The BCA provides that a corporation may be dissolved

1. voluntarily, either by dissolution by the incorporators, by the initial directors, or by the shareholders (BCA §12.05, 12.10, 12.15);

2. by the Secretary of State through a process called "administrative dissolution" (typically as a result of failing to file an annual report and/or to pay the franchise tax) (BCA §12.35); or

3. by the Illinois circuit court through a judicial dissolution proceeding on certain grounds, including fraud, deadlock, and illegal or oppressive action (BCA §12.50).

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Corporate Aspects of Dissolution 13.5

In order to afford the corporation and its shareholders, directors, and officers with the protections provided under the BCA during the dissolution, winding up, and liquidation process, courts strictly interpret the statutory and common law rights of the corporation’s creditors and minority shareholders. The courts, in determining the rights of third parties against a dissolving corporation or the personal liability incurred by a shareholder, director, or officer will carefully scrutinize each transaction to determine whether the statutory dissolution procedures have been followed and the parties affected have been properly notified of their rights.

II. VOLUNTARY DISSOLUTION

A. [13.41 Dissolution by the Incorporators

Like most states, Illinois provides a voluntary dissolution procedure for the incorporators or the initial directors. This form of dissolution is the simplest and is most commonly used when a corporation dissolves without ever actually commencing its business. In such a case, the incorporators or initial directors may determine that the corporation’s existence is no longer necessary for any number of reasons and that its existence should be terminated. Under §12.05 of the BCA, a majority of the initial directors, whether named in the articles of incorporation or elected, or, if there are none, a majority of the incorporators, may vote to dissolve the corporation provided that

a. no shares of the corporation have been issued;

b. all amounts actually paid for the shares, less any part thereof disbursed for necessary expenses, have been retained; /

c. all debts of the corporation are paid; and

d. all incorporators or all directors, as the case may be, are provided with written notice of the election to dissolve the corporation not less than three days before the execution of articles of dissolution.

Illinois does not specifically require as a condition precedent to dissolution to the incorporators or initial directors that the corporation shall not have commenced business. Also, there is no time limit after the articles of incorporation have been filed to file the articles of dissolution.

As in all voluntary dissolutions, articles of dissolution must be filed to effect the dissolution. These articles may be filed by the initial directors or the incorporators. (See §13.11 for a discussion of dissolution filings and filing fees.) Secretary of State Form BCA-12.20, Articles of Dissolution may be used for this purpose. A copy of this form is included at § 13.51.


1. [13.5] By Unanimous Written Consent of Shareholders

After stock of an Illinois corporation has been issued, the corporation may be dissolved by the unanimous written consent of all shareholders who are entitled to vote on dissolution.

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13.6 Closely Held Corporations

Section 12.10 of the BCA authorizes the shareholders to take action to dissolve without any vote, director action, or formal shareholder meetings. A sample form of a shareholder unanimous written consent is included at §13.52.

2. [13.6] By Vote of Shareholders

If it is impractical to obtain the unanimous consent of all of the shareholders, §12.15 of the BCA provides the shareholders with two methods to vote to dissolve the corporation. The first method requires board approval; the second method does not. Whether a corporation voluntarily dissolves with or without board approval, the specific technical requirements of BCA §12 must be scrupulously followed, including the notice and voting requirements.

a. [13.7] With Board Approval

The corporation may voluntarily dissolve pursuant to a proposal adopted by the board of directors and approved by shareholder vote. This method requires that directors adopt a resolution, which may be with or without their recommendation, proposing that the corporation be voluntarily dissolved and directing that the question of such dissolution be submitted to a vote at either an annual or a special meeting of shareholders. BCA §12.15(a)(1).

b. [13.8] Without Board Approval

Unlike some states, Illinois does not expressly require that the board of directors recommend dissolution prior to submitting the matter to the shareholders. Holders of at least one fifth of all outstanding shares entitled to vote on dissolution may propose in writing to the board of directors that the corporation be dissolved. If the directors fail to call a shareholder meeting to consider the proposal for more than one year after delivery of notice to the directors, the shareholders proposing the dissolution may call a meeting of shareholders to consider the proposal. BCA §12.15(a)(2).

3. [13.9] Notice Requirements

When at least one of the purposes of a shareholder meeting is to consider the dissolution of the corporation, each shareholder (whether or not entitled to vote) must be given written notice of the meeting not less than 20 nor more than 60 days before the date of the meeting. In addition to providing the place, date, and time of the meeting, the notice must state that the purpose of the meeting is to consider the voluntary dissolution of the corporation. BCA §12.15(b), 7.15(b).

4. [13.10] Vote Requirements

A minimum two-thirds vote of all outstanding shares entitled to vote on dissolution is required for the adoption of a resolution to voluntarily dissolve a corporation. If any class of shares is entitled to vote as a class, the resolution requires a minimum two-thirds vote of (1) the total outstanding shares of each class of shares entitled to vote as a class on the dissolution and (2) all outstanding shares entitled to vote on the dissolution. BCA §12.15(c). The articles of incorporation may specify a smaller or larger vote requirement but may not reduce the vote to less than a majority of the outstanding shares entitled to vote on dissolution and not less than a majority of the outstanding shares of any class entitled to vote as a class. BCA §12.15(d).

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The BCA is unique in its requirements for dissolution. Other jurisdictions provide different provisions requiring action by the board of directors, voting approval, class voting, notice requirements, and the ability to supersede the applicable statutes in the articles of incorporation. Compare Delaware, for example, which requires that the board of directors adopt a resolution recommending dissolution to the shareholders and only requires an affirmative majority shareholder vote. Delaware General Corporation Law §275.

The power to voluntarily dissolve generally is initiated by the officers, directors, and/or shareholders. Their decision is within the protection of the business judgment rule, and absent wilful, malicious, or unjustifiable purpose, their action will be upheld without any personal liability to third parties. Swager v. Couri, 77 Ill.2d 173, 395 N.E.2d 921, 32 Ill.Dec. 540 (1979).

C. [13.111 Filings

To effect an authorized voluntary dissolution in Illinois, articles of dissolution must be executed and filed in duplicate with the Illinois Secretary of State. The articles of dissolution must include

1. the name of the corporation;

2. the date the dissolution was authorized;

3. a post office address to which may be mailed a copy of any process against the corporation that may be served on the Secretary of State;

4. a statement regarding the issued shares andpaid-in capital of the corporation; and

5. a statement as to the method by which dissolution was authorized.

The information required in the articles of dissolution is set forth in Secretary of State Form BCA-12.20, Articles of Dissolution. A copy of this form is included at §13.51.

If the Secretary of State finds that all of the information required by §12.20 of the BCA has been adequately provided and that all required corporate and shareholder action has been taken, the Secretary of State will issue a certificate of dissolution. The dissolution is effective on the date of the issuance of the certificate. BCA §12.20.

D. [13.12] Withdraw from Doing Business in Other States

It is advisable that during the winding up stage the corporation take all necessary action to withdraw from all states in which it is qualified to do business as a foreign corporation. Otherwise, the corporation may continue to be liable to pay the statutory franchise taxes.

E. [13.13] Revocation of Voluntary Dissolution

If after issuance of the certificate of dissolution the board of directors, in its judgment, determines that the corporation should continue, the directors may revoke the dissolution within 60 days of the issuance of the certificate of dissolution. The election to revoke the dissolution may not be made if the corporation has begun to distribute its assets or has commenced a proceeding for court supervision of its winding up. BCA § 12.25.

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13.14


To revoke a dissolution within this 60-day period, articles of revocation of dissolution must be filed in duplicate with the Illinois Secretary of State. The articles of revocation of dissolution must set forth

1. the name of the corporation;

2. the effective date of the dissolution;

3. a statement that the corporation has not begun to distribute its assets nor commenced a court proceeding for its winding up;

4. the date the revocation was authorized; and

5. a statement that the board of directors authorized the revocation. Id.

If the requisite filings have been made to the satisfaction of the Secretary of State, the Secretary of State will issue a certificate of revocation of dissolution. Failure to timely file the articles of revocation of dissolution is not grounds for the Secretary of State to reject the filing. However, there is a statutorily prescribed late filing penalty (similar to the late filing penalty for annual reports). The revocation of dissolution is effective on the date of issuance of the certificate of revocation of dissolution. Further, the revocation relates back and takes effect as of the date of the issuance of the certificate of dissolution. Thus, the corporation may resume business as if the dissolution had never occurred. BCA §12.25(e). See §13.50 below for a sample copy of Secretary of State Form BCA-12.25, Articles of Revocation of Dissolution. Also see §13.28 below for a discussion of reinstatement of an adminiàtratively dissolved corporation.

F. Winding Up

1. [13.14] Effect of Dissolution

Immediately upon the effective date of the dissolution, the corporate existence of the corporation terminates and the dissolved corporation may not thereafter carry on any business except as may be necessary to wind up and liquidate the corporation’s business and affairs. BCA §12.30. Obviously, the requirements to liquidate or wind up the affairs of a corporation will vary based on the nature and complexity of a corporation’s business. Nevertheless, the directors and officers must be careful to avoid taking any actions that might result in personal liability for any debts or obligations of the corporation incurred after the effective date of the dissolution. See §13.20 below for a discussion of the scope of a director’s liability.

2. [13.151 Ceasing To Do Business

While a dissolved corporation must cease from carrying on any business after the Secretary of State issues the certificate of dissolution, §12.30 of the BCA permits the corporation to collect and dispose of its assets, give statutory notice to its creditors, discharge or make provision for discharging its liabilities, distribute its remaining assets to its shareholders, and carry out such other acts as are necessary to wind up and liquidate its affairs.

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The officers and directors must be cautious that their activities are not construed to be a continuation of the corporation’s business. Entering into any contracts or incurring obligations subsequent to the effective date of the dissolution may subject the directors and/or officers to personal liability if the contracts or obligations are not winding up types of activities.

The corporation’s directive to wind up its activities often conflicts with the prohibition from continuing business, which raises many practical problems for a newly dissolved corporation. For example, it is not uncommon for executory contracts, leases, or other similar types of ongoing corporate obligations to exist upon dissolution. It is also not uncommon as part of the winding up process to enter into contracts for the sale of existing machinery, equipment, and inventory. More difficult questions arise when a corporation needs to purchase additional types of inventory in order to sell the existing inventory. As previously discussed, the officers of the corporation, under the direct supervision of the directors, must limit their actions to winding up the corporation’s activities. See §13.20 and 13.21 below for a discussion of personal liability of the corporation’s directors, officers, and shareholders.

3. [13.16] Notice to Creditors

Some states expressly provide that the corporation must give notice of the dissolution to creditors. In Illinois, giving such notice is elective. Notice is advisable because it benefits the corporation by triggering a time period in which creditors must submit their claims or be barred from later asserting their rights. However, it also alerts creditors to the dissolution and gives them an opportunity to protect their interests.

Under §12.75 of the BCA, a dissolved corporation may bar any known claim against it or its directors, officers, employees, agents, or shareholders by sending notice to known claimants within 60 days from the effective date of the dissolution. The notice must set forth

a. the effective date of the dissolution;

b. the mailing address to which a claimant must send its claim and the essential information to be submitted with the claim;

c. the deadline by which the corporation must receive the claim (not less than 120 days from the effective date of the dissolution); and

d. a statement that the claim will be barred if not received by the deadline. Id.

A sample notice to creditors is included at §13.54 below.

Claims that are not received by the corporation within the statutorily imposed deadline may be forever barred by the corporation. The corporation may also reject a timely submitted claim by providing the claimant with notice of the corporation’s rejection of the claim. The notice must state that unless the claimant files a suit within 90 days from the date of the rejection, the claimant will be statutorily barred from filing suit to enforce the claim. BCA §12.75(c). The statute specifically excludes from the definition of a "claim" any contingent liability or claim arising after the effective date of dissolution, any claim arising from the failure of the corporation to pay any tax, or any claim arising out of criminal law violations. These types of claims are enforceable without regard to the claims period discussed above. BCA §12.75(d), 12.75(e).

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13.17


4. [13.17] Survival of Claims

At common law, dissolution of a corporation terminated the legal existence of the corporation and prevented the corporation from suing or being sued. Even pending proceedings against the corporation were abated. Blankenship v. Demmier Manufacturing Co., 89 IIl.App.3d 569, 411 N.E.2d 1153, 44 Ill.Dec. 787 (1st Dist. 1980); Vance a. North American Asbestos Corp., 203 Ill.App.3d 565, 561 N.E.2d 279, 149 Ill.Dec. 1 (4th Dist. 1990). However, to reconcile the competing objectives of definitively winding up the affairs of a dissolved corporation and preventing the inequity of aborting all claims by and against the corporation, the BCA enacted corporate survival statutes allowing a definite time to commence a suit. Section 12.80 of the BCA provides that a civil action or proceeding available to or against a corporation, its directors, or its shareholders for a claim existing or any liability incurred before the dissolution of the corporation, whether pursuant to a voluntary dissolution or an involuntary dissolution, must be commenced within five years after the date of dissolution. Any such action by or against the corporation may be prosecuted or defended in its corporate name. (Prior to July 1, 1984, the effective date of the BCA, the survival period was two years.)

The courts have emphasized that under BCA §12.80 (and the predecessor statute) only those claims existing on the effective date of dissolution (as opposed to anticipated claims that have not ripened) may be acted on within the five-year survival period, regardless of the circumstances surrounding dissolution. This proposition reflects the legislative intent of establishing a definite point in time when a corporation ceases to exist. In Blankenship, supra, plaintiff brought suit against a dissolved corporation and its president, seeking recovery in strict liability for injuries suffered from a defective product aftbr the expiration of the survival period. The court held that no cause of action existed because the injury occurred after the dissolution. The corporation was under no obligation to provide for future liability resulting from its products after its dissolution.

The five-year survival period is strictly enforced. Even fraud is insufficient to extend the time period for bringing suit. Canadian Ace Brewing Co. a. Joseph Schlitz Brewing Co., 629 F.2d 1183 (7th Cir. 1980). In Vance a. North American Asbestos Corp., supra, the court held that the plaintiff’s allegation that the defendant fraudulently dissolved to avoid future liability was not a sufficient basis to present a factual question as to whether to extend the statutory two-year survival period. However, the court in Moore a. Nick’s Finer Foods, Inc., 121 Ill.App.3d 923, 460 N.E.2d 420, 77 fll.Dec. 364 (1st Dist. 1984), concluded that the policy favoring protecting the rights of minors prevailed and extended the period for filing a claim against a dissolved corporation. This holding was a rare court-imposed exception to the survival period.

5. [13.18] Claims by Former Shareholders in Their Individual Capacities

The limitation imposed by the corporate survival statute does not extend, however, to actions by former shareholders who sue in their individual capacities rather than as former shareholders. Generally, as long as the action was not derivative (i.e., as long as the injury was caused not to the corporation but to the individual shareholders) or an inchoate claim, a former shareholder would have a cause of action in his individual capacity. This issue usually arises when a former shareholder commences a cause of action after the dissolution of the corporation relating to corporate assets to which the shareholder succeeded pursuant to the

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dissolution. If the former shareholder succeeded to an asset on which the shareholder’s claim was based either pursuant to an assignment or by operation of law upon the corporation’s dissolution, the shareholder may pursue a claim in the shareholder’s individual capacity without being barred by the corporate survival statute.

In Shute v. Chambers, 142 Ill.App.3d 948, 492 N.E.2d 528, 97 Ill.Dec. 92 (1st Dist. 1986), the Illinois appellate court found that the corporate survival statute did not apply to a suit filed by a former shareholder that involved an installment note (originally issued to the dissolved corporation as payee) because the note was distributed to the shareholder by operation of law upon the corporation’s dissolution. (See §13.22 below for a discussion of asset distributions to shareholders.) The court stated that the former shareholder’s right to sue on the debt was "in no way derivative of an injury to the former corporation." 492 N.E.2d at 532. In reaching its conclusion, the court reasoned that to allow the corporate survival statute to be applied to the type of claims presented by the plaintiffs "would result in barring former shareholders from enforcing rights to corporate assets at the same time they succeed to ownership of the assets by operation of law." Id. See also Lake County Trust Co. v. Two Bar B, Inc., 182 Ill.App.3d 186, 537 N.E.2d 1015, 130 I1I.Dec. 686 (1st Dist. 1989) (former shareholders of dissolved corporation were not prevented by corporate survival statute from enforcing rights resulting from note that named corporation as payee); Dubey v. Abam Building Corp., 266 Ill.App.3d 44, 639 N.E.2d 215, 203 Ill.Dec. 176 (1st Dist. 1994) (former shareholders’ action to recover security deposit under lease executed by dissolved corporation was not barred by corporate survival statute because security deposit was corporate asset to which shareholder succeeded by operation of law following dissolution). But see Canadian Ace Brewing Co. u. Joseph Schlitz Brewing Co., 629 F.2d 1183 (7th Cir. 1980) (former shareholder’s antitrust action was barred by corporate survival statute since claim was inchoate because it had not been reduced to judgment prior to dissolution).

The Illinois corporate survival statute is distinguished from a statute of limitation. Actions that may be barred by the applicable statute of limitations would not be tolled by the corporate survival statute. For example, the five-year period to file a claim does not extend the two-year statute of limitation for personal injuries. Greenfield v. Ray Stamm, Inc., 242 Ill.App.3d 320, 610 N.E.2d 118, 182 Ill.Dec. 694 (2d Dist. 1993).



The dissolution of a corporation does not automatically impair or take away the rights of creditors who have claims existing prior to the dissolution to seek remedies against the corporation and its shareholders, directors, or other persons receiving distributions after the dissolution becomes effective. Accordingly, the dissolving corporation has an obligation to either pay or provide for its creditors before making any other distributions. Making distributions to shareholders or anyone else without adequately providing for the corporation’s creditors could subject the directors and officers to personal liability for the unfunded corporate obligations. Much like a preference in bankruptcy, such an action could also result in the shareholders having to return the distributions received from the corporation.

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13.20


b. [13.20] Liability of Directors

Section 8.65 of the BCA specifically provides that directors may be personally liable when they have (1) assented to an improper plan for distribution of the corporation’s assets without adequately providing for creditors, (2) failed to provide notice to known creditors, and (3) continued to carry on the business of the corporation after the filing of articles of dissolution with the Secretary of State.

Assenting to an improper plan of distribution occurs if the distribution to shareholders would cause the corporation to be insolvent or would leave the corporation with insufficient assets to provide for the shareholders having preferential liquidation rights. BCA §8.65, 9.10. In this case, the directors would be jointly and severally liable to the extent of the improper distribution. BCA §8.65(a)(1). Only those directors who assent to an improper plan of dissolution would be held personally liable for the unfunded liabilities of the corporation.

Section 8.65(b) of the BCA provides a procedure to record a director’s dissent to an improper plan. A dissenting director who votes against a plan of dissolution must either make sure her dissent is entered in the minutes of the directors meeting or file a written dissent to the action with the secretary of the meeting. Unless a dissenting director complies with the dissenting procedure of BCA §8.65(b), the director would conclusively be presumed to have assented to the action taken.

If the dissolved corporation takes steps to bar known creditors pursuant to the procedures set forth in §12.75 of the BCA, the directors could be personally liable for failing to take reasonable steps to notify known creditors. BCA §8.65(a)(2). Tle. directors in this instance would be jointly and severally liable for losses and damages incurred as a result of the failure to provide notice. If any loss or damage results, the directors’ liability is limited to the value of the assets, if any, improperly distributed upon dissolution. Thomas v. Frederick J. Borgsmiller, Inc., 155 Ill.App.3d 1057, 508 N.E.2d 1235, 108 Ill.Dec. 658 (5th Dist. 1987).

If the corporation continues to operate its business after the filing of the articles of dissolution with the Secretary of State, the directors could be held jointly and severally liable for all debts and liabilities incurred by the dissolved corporation in connection with carrying on the dissolved corporation’s business. BCA §8.65(a)(3).

A director may avoid personal liability for debts for which payment or adequate provision was not made if the director can prove he reasonably relied in good faith on the financial statements or stated book value of the assets of the corporation represented to be correct by the president, chief financial officer, or accountant of the corporation. BCA §8.65(c). Also, the BCA specifically grants any director who is personally held liable under §8.65 a right of contribution from the other directors who are likewise liable for the action.

While the BCA provides circumstances in which a director or shareholder may be held personally liable to third parties, the BCA is not intended to take away the privilege of a director or officer to exercise business judgment and discretion in making the decision to dissolve a corporation. In the context of defining a director’s privilege to influence the actions of a corporation, no duty is created to the corporation’s creditors that takes precedence over the director’s duties to the shareholders. Swager v. Couri, 77 I11.2d 173, 395 N.E.2d 92, 32 Ill.Dec. 540 (1979). The director’s classic fiduciary obligation to the shareholders remains the director’s highest priority.

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13.23

c. [13.21] Liability of Shareholders

If the assets of the corporation are improperly distributed to the shareholders, the directors who are held personally liable are entitled to contribution from the shareholders who knowingly accepted or received any such distribution in proportion to the amounts received by them. BCA §8.65(d). In addition, the courts have found shareholders liable under common law for unlawful distributions they receive. In Reilly v. Segert, 31 Ill.2d 297, 201 N.E.2d 444 (1964), the Illinois Supreme Court held that the existence of a statutory provision that imposed liability on directors of a dissolved corporation for authorizing purchases of stock from shareholders while the corporation was insolvent did not preclude a common law cause of action by the creditors against the shareholders who sold their stock to the insolvent corporation. However, unless the shareholders received an improper distribution, they will not be held personally liable for actions taken against the corporation before or after dissolution unless they are being sued in their capacities as directors.

G. Liquidation

1. [13.221 Executory Contracts

The collection and disposal of the assets of the dissolved corporation present a variety of concerns relating to the liquidation of the physical assets themselves and the assignment of claims and existing executory contracts (i.e., leases).

Subject to the rights of creditors and legal claims of third persons, the remaining assets of a dissolved corporation pass to the shareholders by operation of law. Brooks V. Saloy, 334 Ill.App. 93, 79 N.E.2d 97 (1st Dist. 1948). Such assets include contractual rights secured by a note (see Shute v. Chambers, 142 Ill.App.3d 948, 492 N.E.2d 528, 97 Ill.Dec. 92 (1st Dist. 1986)), installment notes and assignment of rents (see Lake County Trust Co. v. Two Bar B, Inc., 182 Ill.App.3d 186, 537 N.E.2d 1015, 130 Ill.Dec. 686 (1st Dist. 1989)), and security deposits under leases (see Dubey u. Abam Building Corp., 266 Ill.App.3d 44, 639 N.E.2d 215, 203 Ill.Dec. 176 (1st Dist. 1994)). Similarly, the shareholders succeed to the rights and liabilities of the dissolved corporation with respect to unexpired leases to which the dissolved corporation is a party. Such a leasehold estate survives the dissolution of the corporation. Falcone v. Hinsdale Gynecology & Obstetrics, Ltd., 148 Il1.App.3d 439, 499 N.E.2d 694, 102 Ill.Dec. 137 (2d Dist. 1986); Abbott v. Fluid Power Pump Co., 112 Ill.App.2d 303, 251 N.E.2d 93 (5th Dist. 1969). While Illinois courts have not specifically addressed the issue, an argument may be made that a landlord, by succeeding to the leasehold estate, may be able to enforce the remaining terms of the lease entered into with the dissolved corporation against the shareholders who succeed to the lease. (See also §13.17 above for a discussion of the effect of the corporate survival statute with respect to causes of action relating to these types of corporate assets.)

2. [13.23] In-Kind Distributions

The BCA, unlike some other states’ statutes, does not expressly provide that distributions of assets to shareholders upon dissolution be made either in cash or in kind. While BCA §12.30(a)(4) permits a distribution of a corporation’s "remaining assets among its shareholders according to their interests," the statute does not provide any further guidance as to how to accomplish a distribution of physical assets to shareholders. In keeping with the

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overriding aim of distributing the remaining assets equitably among the shareholders while at the same time not defeating the basic goal and principle of truly dissolving the corporation, problems arise when the corporation’s assets consist of non-fungible inventory, equipment, or real property that is not readily marketable. Illinois courts have not given much guidance regarding a fair division of such property. If the property is of an appropriate type (e.g., a mineral lease), it may be possible to provide fair and equitable pro rata distributions of undivided joint interests in the property to the shareholders. See Blanchard v. Commonwealth Oil Co., 116 So.2d 663 (Fla. Dist. Ct.App., 3d Dist. 1959). If the property is not divisible, an appropriate sale of interest among shareholders may be the only alternative.

Another issue that arises is whether some shareholders (usually the controlling shareholders) may be distributed assets and the other shareholders distributed cash. This type of pro rata distribution may cause disgruntled minority shareholders to object, claiming an inequitable distribution. One alternative may be to give all of the shareholders an option to receive cash or a pro rata distribution of an undivided interest in the assets. See Shrage v. Bridgeport Oil Co., 31 Del.Ch. 305, 71 A.2d 882 (1950).

The majority shareholders who want to continue the business may offer to liquidate by auction because they know that they would be the likely buyers and would be able to purchase the assets at a bargain price. In Blanchard v. Commonwealth Oil Co., supra, the Florida court found such an auction to be inequitable to the minority shareholders when, as in that case, the property was capable of being distributed in kind.

A majority shareholder may consider buying out the minority shareholders’ interest. Although Illinois courts have not ruled on this type of transaction, courts in other jurisdictions seem to be divided as to whether a minority shareholder’s interest may be discounted for lack of marketability. See Blake v. Blake Agency, Inc., 107 A.D.2d 139, 486 N.Y.S.2d 341 (1985); In re Fleischer, 107 A.D.2d 97, 486 N.Y.S.2d 272 (1985); Ronald v. 4-C’s Electronic Packaging, Inc., 168 Cal.App.3d 290, 214 Cal.Rptr. 225 (1985); Raskin v. Walter Karl, Inc., 129 A.D.2d 642, 514 N.Y.S.2d 120 (1987).

The BCA does not specifically require that the shareholders return their shares upon the receipt of a shareholders’ distribution. However, it is advisable that the shareholders be required to return their stock certificates as a formal way of documenting the dissolution and liquidation. The shareholders should also provide the corporation with receipts for property received and releases for any outstanding disputes the shareholders may have against the corporation or its directors.

H. [13.241 Dissenters’ Rights

Unlike other states, the BCA does not specifically provide for a form of appraisal rights to dissenting shareholders on dissolution. Section 11.65(a)(2) of the BCA does provide, however, that a shareholder has a right to dissent and obtain payment for the shareholder’s shares upon a sale or exchange of all or substantially all of the corporation’s assets outside the ordinary course of business. However, the statute does not expressly state that such a sale of assets includes a sale in dissolution.

While Illinois courts have not directly addressed the issue, it has been held in other jurisdictions that the sale of assets in the course of liquidation constitutes a sale of assets other than in the ordinary course of business. Accordingly, the dissolving corporation was

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Corporate Apsects of Dissolution 13.26

required to follow the dissenting procedures of the applicable state statutes. Alcoma Corp. v. Ackerman, 26 Misc.2d 678, 207 N.Y.S.2d 137 (1960). The board of a dissolving corporation should evaluate the possibility of an Illinois court’s providing dissenting shareholders with appraisal rights pursuant to §11.70 of the BCA.

I. [13.25] Plan of Liquidation and Dissolution

As discussed in this chapter, competing interests in a corporate dissolution invariably lead to many disputes as to the manner of winding up and liquidating. Accordingly, it is advisable that the corporation adopt a well conceived formal plan of liquidation and dissolution with specific detail for the distribution of the corporation’s assets. Such a plan of liquidation should include

1. identification of the corporation, its state of incorporation, and its address;

2. a statement of the number of shares authorized, issued, and outstanding;

3. a statement that upon the filing of articles of dissolution the corporation will cease transacting business except for purposes of winding up its affairs, prosecuting and defending claims by or against it and otherwise collecting and disbursing its obligations, and disposing and conveying its property;

4. a statement that the corporation will give notice to its known creditors, collect its assets, and discharge its liabilities;

5. the manner in which the corporation will dispose of its assets;

6. the manner in which the remainder of its assets will be distributed among its shareholders;

7. a statement that the corporation may retain sufficient. cash or property to meet certain anticipated claims or liabilities of its creditors;

8. a statement that the distributions to the shareholders are made in complete cancellation and redemption of all of the outstanding shares of stock of the corporation and that the shareholders will surrender their certificates to the corporation upon receipt of their distributions; and

9. a statement that the officers and directors are authorized to file the articles of dissolution and other forms or reports required to be filed by the corporation, including those to be filed with the Internal Revenue Service (Form 966), and that they are authorized to do and perform any and all acts and things that they deem advisable to fully effect and carry out the purpose of the dissolution.

See §13.55 below for a sample plan of dissolution and liquidation.

J. [13.26] Checklist for Voluntary Dissolution

The following is a checklist of steps the practitioner should consider in effecting a voluntary dissolution of a closely held corporation:

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13.27


1. Review the corporation’s articles of incorporation, bylaws, and shareholder agreements and Article 12 of the BCA.

2. Review the corporation’s principal executory contracts (i.e., leases, etc.).

3. Consult a tax advisor for the tax effects of liquidation.

4. Determine the assets and liabilities of the corporation.

5. Prepare a schedule of known creditors.

6. Prepare a plan of dissolution and liquidation.

7. Prepare applicable notices, minutes, and resolutions of director and shareholder meetings (or obtain written consents).

8. Prepare and file articles of incorporation.

9. File federal tax form and return (Form 965) within 30 days from adoption of the plan of complete liquidation and dissolution.

10. File a certificate of dissolution with the county clerk or recorder, as required.

11. Cease doing business.

12. Prepare notice to known creditors (BCA §12.75).

13. Prepare and file applicable foreign jurisdiction withdrawal documents.

14. Collect and dispose of assets.

15. Pay or provide for creditors.

16. Make distributions to shareholders and obtain receipts and applicable releases.

III. INVOLUNTARY DISSOLUTION


1. [13.27] Grounds

The Illinois Secretary of State may administratively dissolve a corporation if it has failed to (a) file its annual report or final transition annual report and pay its franchise tax when due, (b) file in the Office of the Secretary of State any report after the expiration of the period prescribed in the BCA for filing such a report, or (c) appoint and maintain a registered agent in Illinois. BCA §12.35.

After the Secretary of State determines that one or more statutory grounds exist for the administrative dissolution of a corporation, the Secretary of State will mail a notice of delinquency to the registered agent or, if none, to the last known office of the president or

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other principal officer of the corporation. BCA §12.40(a). If the corporation does not correct the default within 90 days following the date of the notice of delinquency, the Secretary of State will administratively dissolve the corporation by issuing a certificate of dissolution that recites the grounds for dissolution and its effective date. The grounds for administrative dissolution are raised only by the state, at its discretion, and may not be raised in a collateral proceeding. People ex rel. Cassidy v. James Karban & Co., 307 Ill.App. 310, 30 N.E.2d 149 (1st Dist. 1940). As a practical matter, the Illinois Secretary of State is technologically advanced, using sophisticated computer systems that in almost all cases generate the appropriate action for an administrative dissolution when a corporation fails to file an annual report. The Secretary of State has a more limited access to the failure of companies to file other types of reports.

Like a voluntary dissolution, the administrative dissolution terminates the corporation’s existence, and the dissolved corporation must cease from carrying on any business or activities except those necessary for winding up such as notifying creditors under BCA §12.75 (see §13.16 of this chapter) and those actions specified under BCA §12.30. A director or corporate officer who continues the business after an administrative dissolution may likewise incur personal liability for the debts and liabilities of the dissolved corporation under BCA §8.65. (See §13.20 of this chapter for a discussion of directors’ liability.) Chicago Title & Trust Co. v. Brooklyn Bagel Boys, Inc., 222 Ill.App.3d 413, 584 N.E.2d 142, 164 Ill.Dec. 930 (1st Dist. 1991); Richmond Wholesale Meat Co. v. Hughes, 625 F.Supp. 584 (N.D.Ill. 1985); Steve’s Equipment Service, Inc. v. Riebrandt, 121 Ill.App.3d 66, 459 N.E.2d 21, 76 IIl.Dec. 612 (2d Dist. 1984).

2. [13.28] Reinstatement

A corporation that has been administratively dissolved may be reinstated by the Secretary of State within five years following the date of issuance of the certificate of dissolution if the dissolved corporation (a) files an application for reinstatement in duplicate with the Secretary of State and (b) files all reports due (e.g., annual reports) and pays all fees, franchise taxes and penalties that are then due. BCA §12.45. (See §13.56 below for a sample application for reinstatement setting forth the statutorily required information.) When the dissolved corporation has complied with all of the provisions of BCA §12.45, the Secretary of State will issue a certificate of reinstatement.

3. [13.29] Effect of Reinstatement

Upon reinstatement

the corporation’s existence shall be deemed to have continued without interruption from the date of the issuance of the certificate of dissolution, and the corporation shall stand revived with such powers, duties and obligations as if it had not been dissolved; and all acts and proceedings of its officers, directors and shareholders, acting or purporting to act as such, which would have been legal and valid but for such dissolution, shall stand ratified and confirmed. BCA §12.45(d).

Absent this reinstatement statute, every contract, transfer, debt, or other transaction with a corporation as a party would require every third party to verify the good standing of the corporation. See Jacquelyne M. Sularz, The Effects of Reinstatement Upon Involuntarily Dissolved Corporations, 81111.134. 474 (1993).

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Section 12.45(d) codified the common law doctrine of "relation back," which permitted a reinstated corporation to ratify actions taken on its behalf while it was dissolved, giving these actions legal effect from the time they were taken. Chicago Title & Trust Co. v. Brooklyn Bagel Boys, Inc., 222 Ill.App.3d 413, 584 N.E.2d 142, 164 I11.Dec. 930 (1st Dist. 1991). However, §12.45(d) does not specifically address the typical concerns of the individual liability of directors and officers who enter into these transactions during the interim period of dissolution and reinstatement.

The courts have made it clear that a reinstatement validates contracts entered into during the interim between a corporation’s dissolution and its reinstatement unless doing so will adversely affect well established public policy principles. Regal Package Liquor, Inc. v. J.R.D., Inc., 125 Ill.App.3d 689, 466 N.E.2d 409, 80 Ill.Dec 957 (5th Dist. 1984). However, the courts have specifically ruled that §12.45(d) will not transform individual liability into worthless corporate liability, nor will it create a legal fiction contrary to the true nature of events. Estate of Plepel v. Industrial Metals, Inc., 115 IlI.App.3d 803, 450 N.E.2d 1244, 71 Ill.Dec. 365 (1st Dist. 1983); Department of Revenue v. Semenek, 194 III.App.3d 616, 551 N.E.2d 314, 141 Ill.Dec. 321 (1st Dist. 1990) (shareholders of dissolved corporation were held personally liable for sales tax for sales made after corporation was dissolved and before reinstatement). Steve’s Equipment Service, Inc. v. Riebrandt, 121 Ill.App.3d 66, 459 N.E.2d 21, 76 Ill.Dec. 612 (2d Dist. 1984) (personal liability limited to cases in which officer or director knew or should have known of the dissolution). In Chicago Title & Trust Co. v. Brooklyn Bagel Boys Inc., supra, the court held both the reinstated corporation and the corporation’s director-officer jointly and severally liable for breach of a lease when the director-officer continued to operate the business after dissolution.

Based on these judicially created exceptions to the relation-back doctrine promulgated under §12.45(d), all corporate officers and directors must be particularly cognizant of the exposure to personal liability if they continue to conduct business after an administrative dissolution. Generally, while personal liability may attach to a director or officer, the contracts or transactions entered into during the interim period would become validated and enforceable by the corporation upon reinstatement.

While under BCA §12.80 a dissolved corporation generally has five years after dissolution to file a claim, the corporation is barred from prosecuting any such claim until it has paid to the state its past due franchise taxes, fees, and penalties. BCA §15.85. BCA §15.85 is not an absolute bar to the prosecution of such claims, nor does it extinguish any claims filed; it merely serves as a temporary impediment to completing the action until the past due taxes, fees, and penalties are paid in full. Merchants Environmental Industries, Inc. v. Montgomery Ward & Co., 252 Ill.App.3d 906, 625 N.E.2d 689, 192 Ill.Dec. 534 (1st Dist. 1993).


1. [13.30] Statutory Grounds

Dissension among shareholders in a closely held corporation is not an uncommon occurrence. When dissension exists, the operation and management of the corporation may come to a virtual standstill, especially when the dissenting shareholders own equal shares. Often in such a case one or more of the shareholders believe the corporation is being operated

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Corporate Apsects of Dissolution 13.33

in a manner that is not in their best interest. As a result of certain of these circumstances and problems that arise within the operation or management of a closely held corporation, the shareholders and some of the creditors and/or the Attorney General may have no viable alternative other than to seek the dissolution of the corporation. If this cannot be accomplished through a voluntary dissolution, these parties must proceed through the courts. The authority and jurisdiction of the Illinois courts to order the dissolution of a corporation is exclusively statutory. Glickauf v. Moss, 23 I1l.App.3d 679, 320 N.E.2d 132 (1st Dist 1974). The BCA has provided the statutory authority for the Attorney General, a creditor, a shareholder, or the corporation itself, depending on the grounds alleged, to maintain a judicial action to dissolve the corporation. See BCA §12.50.

While in certain instances dissolution is appropriate and may be the only reasonable remedy, the Illinois Supreme Court has cautioned that a corporate dissolution is "a drastic remedy that must not be lightly invoked." Gidwitz v. Lanzit Corrugated Box Co., 20 Ill.2d 208, 170 N.E.2d 131, 138 (1960). The BCA has also provided several alternative remedies to dissolution, including the purchase of shares owned by the complaining shareholder, appointing a provisional director, or appointing a custodian. BCA §12.55. (See §13.36 - 13.45 below for a discussion of alternative remedies.)

2. [13.31] Action by Attorney General

A circuit court may dissolve a corporation if the Attorney General establishes that (a) the corporation obtained its articles of incorporation through fraud, (b) the corporation has continued to exceed or abuse the authority conferred on it by law after the corporation has received notice of the same, or (c) the corporation has falsely answered - or failed to answer any interrogatory propounded by the Secretary of State. BCA §12.50(a).

3. [13.321 Action by Creditor (Insolvency)

Generally, creditors find federal bankruptcy proceedings more efficient and advantageous than seeking a court-ordered dissolution of an insolvent corporation. Nonetheless, the BCA provides a statutory mechanism whereby the circuit court may dissolve a corporation pursuant to an action by a corporate creditor if the creditor establishes that (a) the creditor’s claim has been reduced to judgment, an execution of the judgment has been returned unsatisfied, and the corporation is insolvent or (b) the corporation has admitted in writing that the creditor’s claim is due and owing and the corporation is insolvent. BCA §12.50(c). A corporation may defend a creditor’s action of dissolution by asserting and proving that the corporation is in fact solvent.



A circuit court may dissolve a corporation pursuant to an action by a shareholder if the shareholder can establish at least one of the following: (1) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock and the deadlock causes or threatens to cause irreparable injury to the corporation, or the business of the corporation can no longer be conducted to the general advantage of the shareholder; (2) the directors have acted, are acting, or will act in an illegal, oppressive, or fraudulent manner; or (3) the corporate assets are being misapplied or wasted. BCA §12.50(b).

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13.34

Closely Held Cororations

b. [13.34] Director Deadlock

Corporate deadlock is an alternative ground for a judicially ordered dissolution. While §12.50(b)(1) does not specifically define when a deadlock occurs, it provides that a deadlock may exist based on an even division in the number of directors or because of voting requirements in the articles of incorporation or bylaws that prevent the corporation from taking any action. BCA §12.50(b)(1).

A shareholder must prove both the existence of a deadlock and either the existence or the threat of irreparable injury to the corporation or that the business can no longer be conducted to the advantage of the shareholder. Since the terms "deadlock" and "irreparable injury" present a problem of interpretation, an action based on corporate deadlock is not a frequent ground for dissolution used by shareholders.

The court in Callier v. Callier, 61 Ill.App.3d 1011, 378 N.E.2d 405, 408, 18 Ill.Dec. 941 (5th Dist. 1978), in its discussion of a corporate deadlock involving two shareholders, quoted RKO Theatres, Inc. v. Trenton-New Brunswick Theatres Co., 9 N.J.Super. 401, 74 A.2d 914, 918 (1950), in stating, "Succinctly defined, a deadlocked corporation is one which, because of decision or indecision of stockholders, cannot perform its corporate powers." The court further added that "dissension among stockholders is not a ground for dissolution unless it is of such serious proportions as to defeat the end for which the corporation is organized." Callier, 378 N.E.2d at 408. Based on this interpretation, the court concluded there was insufficient proof of deadlock or irreparable injury when two equal shareholders were unable to get along and reach an agreement to redeem one or the other’s shares or agree on the terms of a voluntary dissolution. This lack of proof, coupled with the fact that the corporation continued to operate in an extremely profitable manner notwithstanding the dissension, did not establish "an inability of the corporation to perform the functions for which it was created." Id. See Smith-Shrader Co. v. Smith, 136 Ill.App.3d 571, 483 N.E.2d 283, 91 Ill.Dec. 1 (1st Dist. 1985) (citing Callier in holding that neither 50-percent shareholder established legitimate shareholder deadlock and irreparable injury).

Both Callier and Smith-Shrader Co. involved the typical situation in which a 50-percent shareholder left the corporation and immediately organized and operated a business that directly competed with the shareholder’s former corporation. In determining whether to dissolve the corporations on the ground of deadlock, the courts took into consideration the manifest unfairness of allowing a shareholder or director who breaches his fiduciary duty to his former corporation by siphoning off the going-concern value of the business to benefit by a judicial order of dissolution to the detriment of the remaining 50-percent shareholder.

On the other hand, the court in Ward v. Colcord, 110 Ill.App.2d 68, 249 N.E.2d 137 (1st Dist. 1969), ruled the corporation was deadlocked when a court order was necessary to force a 24’/2-percent shareholder and director to sign checks and pay bills and when the unanimous vote of the directors was required regarding all corporate actions.

Generally, the courts are hesitant to issue an order oi dissolution on a claim of deadlock under §12.50(b). Typically, unless the actions at issue are coupled with the presence of oppressive conduct, a serious impairment of the corporation’s functions, or serious injury to the shareholders, a court will not order a judicial dissolution on the grounds of deadlock. In the alternative, if a court does determine that a deadlock of some sort exists, the court may find an alternative remedy under §12.55 of the BCA. See §13.36 - 13.45 below for a discussion of alternative remedies.

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Cororate Aspects of Dissolution 13.35

c. [13.35] Oppression

A shareholder may also seek a judicial order for dissolution if the shareholder establishes that the directors or those in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent. BCA §12.50(b)(2). Unlike some other states that require a certain percentage ownership to bring such an action, any shareholder may bring such an action under the BCA.

The concept of oppression as a ground for corporate dissolution has been available to shareholders since 1933, but the cases and BCA do not provide a clear interpretation of its precise scope. Central Standard Life Insurance Co. v. Davis, 10 Ill.2d 566, 141 N.E.2d 45 (1957); Notzke v. Art Gallery, Inc., 84 Ill.App.3d 294, 405 N.E.2d 839, 39 I1l.Dec. 860 (3d Dist. 1980). However, the Illinois Supreme Court in Central Standard Life Insurance Co. v. Davis, supra, 141 N.E.2d at 50, stated:

The word "oppressive" does not carry an essential inference of imminent disaster; it can, we think, contemplate a continuing course of conduct.

Plaintiff argues that the word "oppressive" does not necessarily savor of fraud, and that the absence of "mismanagement, or misapplication of assets" does not prevent a finding that the conduct of the defendants has been oppressive. We agree with that interpretation, and we reject defendants’ argument that the word is substantially synonymous with "illegal" and "fraudulent." -

See also Gidwitz v. Lanzit Corrugated Box Co., 20 I11.2d 208, 170 N.E.2d 131 (1960).

The Illinois Supreme Court has made it clear that it is unnecessary to establish fraud, illegality, or even loss to prove grounds for oppression. No single act by itself will be deemed oppressive without consideration of the surrounding circumstances. Each case claiming oppression must be determined solely on its own facts. Coduti v. Heliwig, 127 Ill.App.3d 279, 469 N.E.2d 220,82 Ill.Dec. 686 (1st Dist. 1984).

In Compton v. Paul K Harding Realty Co., 6 I11.App.3d 488, 285 N.E.2d 574, 581 (5th Dist. 1972), an "arbitrary, overbearing and heavy-handed course of conduct" by the president of a closely held corporation, which included failure to call meetings of the board of directors or to consult with plaintiff regarding management of the corporation, the president’s "imperious attitude when questioned about his salary[,] and his dilatory reaction" to the minority stockholders’ requests justified a finding of oppression. Likewise, in Gidwitz v. Lanzit Corrugated Box Co., supra, the Supreme Court held that when an equal division of stock between two families resulted in a ten-year deadlock enabling the president to use his position without majority stock support to completely control and manage the corporation so as to effectively deprive plaintiff’s family of their rights and privileges as directors and officers and there were no board of director and shareholder meetings at which the shareholders were entitled to vote, the president’s refusal to comply with the corporation’s bylaws, his earning personal profits from dealings with the corporation, and other facts that indicated that he and his family exhibited a continuing course of oppressive conduct to the complete exclusion of the plaintiff’s rights and powers warranted a finding of oppression and the drastic remedy of dissolution.

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Similarly, conspiratorial action on the part of two defendant shareholders affecting a third shareholder’s control over corporate matters and the effective operation and profitability of the business and their depriving the shareholder of his managerial employment, coupled with an irregularity in the equity transfer of a defendant shareholder (when one defendant sold his shares to the other defendant), met the threshold of oppressiveness under the BCA. Notzke v. Art Gallery, Inc., supra. See also Hager-Freeman v. Spircoff, 229 Ill.App.3d 262, 593 N.E.2d 821, 171 Il1.Dec. 1 (1st Dist. 1992) (oppression was found when second shareholder deceptively purchased shares from third shareholder, enriched himself with corporate assets at expense of shareholder, and deprived plaintiff of opportunity to participate in operation of business).

On the other hand, in Coduti v. Heliwig, supra, the court found that the facts and circumstances surrounding petitioner’s allegations that defendant shareholder refused to authorize dividends or bonuses when the corporation had large cash reserves, held directors meetings without notice to petitioner, caused petitioner to be arrested, opened petitioner’s mail, and belittled him in the presence of others did not sufficiently establish oppressive conduct that would have entitled him to a remedy of dissolution. The petitioner’s complaint stemmed from his position as a minority shareholder and from his personal disagreements with the majority shareholder and thus did not form a basis for the drastic relief of dissolution. Also, in Polikoff v. Dole & Clark Building Corp., 37 IIl.App.2d 29, 184 N.E.2d 792 (1st Dist. 1962), the court held that the plaintiff’s allegations relating to the majority shareholder’s conduct were related solely to business decisions (too much or too little money spent on advertising, salaries, and rehabilitation of property) and did not support a finding of oppressive conduct. The court noted that the BCA

has given to the courts the power to relieve minority shareholders from oppressive acts of the majority, but the remedy of liquidation is so drastic that it must be invoked with extreme caution. The ends of justice would not be served by too broad an application of the statute, for that would merely eliminate one evil by substituting a greater one - oppression of the majority by the minority. 184 N.E.2d at 795.



In either an action for judicial dissolution or an action that alleges the grounds for dissolution set forth in BCA §12.50 but that does not seek dissolution, the court may provide for one of the following remedies as an alternative to dismissing the action or ordering dissolution:

1. appoint a provisional director;

2. appoint a custodian; or

3. in an action by a shareholder, order a purchase of the complaining shareholder’s shares. BCA §12.55.

A party may seek an independent remedy under §12.55 without seeking dissolution as long as the requisite grounds for a judicial dissolution are established. Kimmel v. Wirtz, 793 F.Supp. 818 (N.D.Ill. 1992); Cod uti v. Heliwig, 127 Ill.App.3d 279, 469 N.E.2d 220, 82 IlI.Dec. 686 (1st Dist. 1984).

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b. [13.37] Appointment of Provisional Director or Custodian

As an alternative remedy, the court may appoint a provisional director or a custodian if, in the court’s discretion, it appears such an action will remedy the grounds for dissolution alleged by the complaining shareholder under §12.50. BOA §12.55(b), 12.55(c).

(1) [13.38] Provisional director

"A provisional director is appointed as an alternative remedy to judicial dissolution in times of corporate strife to help guide the company through crisis toward the goal of stabilization and prosperity." Abreu ex rel. Ebro Foods v. Unica Industrial Sales, Inc., 224 Ill.App.3d 439, 586 N.E.2d 661, 665, 166 Ill.Dec. 703 (1st Dist. 1991).

A provisional director may be appointed notwithstanding that there is no vacancy on the board of directors. The provisional director will have all the rights and powers of a duly elected director, including the right to receive notice of and vote at directors’ meetings.

When appointing a provisional director, the court considers only the best interests of the corporation and not those of any warring factions. Id. In Abreu, the court upheld the appointment as a provisional director of the plaintiff’s son-in-law, who had worked for the corporation for 17 years. The court noted that in Illinois, unlike some other states, there was no requirement that the appointed provisional director not be aligned with a particular group of shareholders. The court determined that if there is no traditionally independent third party with the requisite skills and abilities to fulfil the position within an urgent time frame, it may appoint a qualified person who happens to be aligned with a,-particular group of shareholders. Id.

The court also noted that the appointed director is an officer of the court and serves at the discretion and direction of the court. To require an independent third party who needs time to get familiar with the history and goals of the corporation and its crisis situation is to ignore the mission of §12.55.

Some of the factors that a court may balance in evaluating candidates for provisional directors include the degree and quality of past involvement in the corporation, an understanding of the corporation’s history and current situation, experience and abilities in providing a cooperative and unifying element, need for immediate appointment, degree of impartiality, and, most importantly, a true interest in the viability and advancement of the corporation as an entity and not allegiance to one of the deadlocked factions. Id. In Abreu, an appointed director was qualified because he worked for the corporation for 17 years, was a CPA, and had complete knowledge of the history of the deadlocked factions.

(2) {13.39] Custodian

The appointed custodian is entitled to exercise all the powers of the corporation’s directors and officers to the extent necessary to manage the business and affairs of the corporation to the general advantage of its shareholders and creditors. The custodian’s powers may be exercised, in the discretion of the custodian or the court, directly or through or in conjunction with the corporation’s directors or officers. BC §12.55(c).

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13.40


(3) [13.40] Term

An appointed provisional director or custodian serves until he is removed by court order or, unless otherwise ordered by the court, removed by a vote of the shareholders sufficient either to elect a majority of the board of directors or, if greater than majority voting is required by the articles of incorporation or the bylaws, to elect the requisite number of directors needed to take action. BCA §12.55(b), 12.55(c).

c. [13.41] Purchase of Shareholder’s Shares

During the pendency of an action alleging grounds for judicial dissolution under § 12.50 of the BCA and upon motion by a shareholder, the court may order the corporation to purchase the complaining shareholder’s shares. The BCA sets forth two different procedures to be followed when a complaining shareholder seeks to be bought out and when a corporation or any other shareholder or group of shareholders seeks to buy out a complaining shareholder’s shares.

(1) [13.42] Upon motion of complaining shareholder

A complaining shareholder may seek to be bought out instead of pursuing an order of dissolution. Upon motion by the complaining shareholder, the court in its discretion may order the corporation to purchase the shares of the complaining shareholder at a fair price determined by the court. The fair price may be determined with or without the assistance of appraisers, may be payable in cash or in installments, and may be with or without such security other than personal commitments of other shareholders as the court may direct. BCA §12.55W.

(2) [13.43] Upon motion of corporation or other shareholders

Either the corporation or any shareholder or group of shareholders may, any time after the filing of an action for judicial dissolution by a complaining shareholder, petition the court to purchase the shares of a complaining shareholder, and, unless the court finds this procedure to be inequitable, the court will determine the fair value of the shares as of the date the court finds equitable. In so doing, the court will follow the appraisal procedures set forth under BCA §11.70 and will thereafter dismiss the action. BCA §12.55(g).

Unlike §12.55(f) governing complaining shareholder requests to be bought out, §12.55(g) governing corporation or other shareholder actions is silent as to whether installment payments are permissible. This issue was addressed in Taxy v. Worden, 181 Ill.App.3d 97, 536 N.E,2d 901, 129 Ill.Dec. 851 (1st Dist. 1989), in which the court held that the complaining shareholder did not adequately demonstrate that he had been prejudiced by the allowance of installment payments or that the trial judge abused his discretion and acted inequitably in allowing such payments.

(3) [13.44] Fair value

In an action by a corporation or another shareholder seeking to buy out the complaining shareholder, the court will determine the fair value of the shares utilizing the appraisal procedures outlined in BCA §11.70. Section 11.70(g) provides that the jurisdiction of the court is "plenary and exclusive" and that the court may appoint appraisers to receive evidence and recommend a decision on the question of "fair value."

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While no definition of "fair value" is provided by the BCA, the Illinois courts have held that it should be "determined by an exercise of the court’s judgment after consideration of all relevant factors." Taxy v. Worden, 181 Ill.App.3d 97, 536 N.E.2d 901, 904, 129 Ill.Dec. 851 (1st Dist. 1989). See also Kalabogias v. Georgou, 254 I1l.App.3d 740, 627 N.E.2d 51, 193 Ill.Dec. 892 (1st Dist. 1993). The court in Taxy v. Worden identified the following as relevant factors: the market price for the shares, the nature of the business and its history, the economic outlook of the business and of the specific industry, the book value of the stock and the financial condition of the business, the earning and dividend-paying capacity of the corporation, the existence of goodwill or other intangible assets, the size of the block of stock to be valued, and the market value of publicly held corporations in similar lines of business.

d. [13.45] Attorneys’ Fees

If the court determines that any party in an action for judicial dissolution has acted arbitrarily, vexatiously, or not in good faith in the action or in connection with any alternative relief, the court may, in its discretion, award attorneys’ fees and other reasonable expenses to the parties adversely affected by the action. BCA §12.55(h). However, the award of attorneys’ fees is only for conduct during the course of litigation as opposed to before commencement of the litigation. Abreu ex rel. Ebro Foods v. Unica Industrial Sales, Inc., 224 Ill.App.3d 439, 586 N.E.2d 661, 166 Ill.Dec. 703 (1st Dist. 1991).


a. [13.46] Commencing the Action

The practice in actions for judicial dissolution is the same as in other civil actions except as otherwise provided in the BCA. Every action for judicial dissolution must be commenced in the circuit court of the county in which either the registered office or the principal office of the corporation is located. Summons is issued and served in the same manner as in other civil actions. BCA §12.60(a).

h. [13.47] Parties

Unless relief is sought against the shareholders personally, it is not necessary to make shareholders of the corporation parties to any action or proceeding for dissolution. The court, however, may order that the shareholders be made parties. BCA §12.60(c).

While the BCA does not contain a specific requirement that a corporation is a necessary party defendant, common sense dictates that the corporation is a necessary party to the judicial dissolution proceedings since the corporation is "legally or beneficially interested in the subject matter of the litigation." Glickauf v. Moss, 23 Ill.App.3d 679, 320 N.E.2d 132, 135 (1974), quoting Oglesby v. Springfield Marine Bank, 385 Ill. 414, 52 N.E.2d 1000, 1004 (1944).

In contrast to the general rule that shareholders are limited to derivative actions, shareholders may sue the corporation under §12.50(b)(2) directly for its dissolution. This enables minority shareholders to recover their investments from the corporation when no other methods are available. Kalabogias v. Georgou, 254 Ill.App.3d 740, 627 N.E.2d 51, 193 Ill.Dec. 892 (1st Dist. 1993).

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13.48


c. [13.48] Court Action

Until a full hearing can be had in an action for judicial dissolution, the circuit court may issue injunctions, appoint an interim receiver, and take other action as is necessary or desirable to preserve the corporate assets and carry on the business of the corporation. BCA §12.60(d).

Upon a hearing and after finding that grounds for a judicial dissolution exist, the court may enter an order dissolving the corporation, and the clerk of the court will deliver a certified copy of the order of dissolution to the Illinois Secretary of State and record the order with the recorder of the county in which the registered office of the corporation is located. BCA §12.65(a). After entering the order of dissolution, the court will direct the winding up and liquidation of the corporation’s business in accordance with §12.30, notify the corporation’s known claimants in accordance with §12.75, and retain jurisdiction until the winding up is complete. BCA §12.65(b).

d. [13.49] Liquidating Receiver

The court may appoint a liquidating receiver with authority to wind up and liquidate the corporation’s business and affairs, including, without limitation, collecting, selling, conveying, and disposing of the corporation’s assets. The order appointing the receiver will state his powers and duties, which may be increased or diminished at any time during the proceedings. BCA §12.60(e). The appointed receiver has the authority to sue and defend in all courts in his own name as receiver of the corporation. BCA §12.60(f). The receiver must be a resident of Illinois and would be allowed a reasonable compensation fron the assets of the corporation for services rendered. BCA §12.60(g), 12.60(i).

e. [13.50] Reporting Requirements, Liability, and Compensation

An appointed provisional director or custodian must report to the court from time to time concerning the matter complained of or the status of the deadlock, if any, and of the status of the corporation’s business as the court will direct. In addition, if directed by the court, he will submit recommendations concerning the appropriate disposition of the action. No provisional director or custodian will be held liable for any action taken or decision made in good faith. BCA §12.55(d). The court will also allow the provisional director or custodian reasonable compensation for services rendered and reimbursement for reasonable costs and expenses, which amounts are to be paid by the corporation. BCA §12.55(e).

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IV, APPENDIX

A. [13.51] Articles of Dissolution

The following is Secretary of State Form BCA-12.20, Articles of Dissolution. This form may be used for (1) voluntary dissolution of a corporation by a majority of its incorporators or initial directors under BCA §12.05 and (2) voluntary dissolution by the act of the corporation under BCA §12.15. This form must be submitted in duplicate to the Illinois Secretary of State along with the required filing fee.

FORM BCA-12.20 ARTICLES OF DISSOLUTION (Rev. Jan. 1995) - File #

George H. Ryan Secretary of State Department of Business Services Springfield, IL 62756 Telephone (217) 782-2353

Remit payment in check or money order, payable to "Secretary of State."

This space for use by Secretary of State UBMIT IN DUPLICATE

This space for use by Secretary of State

Date Franchise Tax $ Filing Fee $ 5.00 Penalty $ Interest $

1. CORPORATE NAME:

2. Post office address to which may be mailed a copy of any process against the corporation that may be served on the Secretary of State:

3. Dissolution of the corporation was duly authorized on __________________________, 19 the manner

indicated below: (Mark an "X" in one box only)

� By a majority of the incorporators, provided no directors were named in the Articles of Incorporation and no directors have been elected; or by a majority of the board of directors, in accordance with Section 12.05, the corporation having issued no shares as of the authorization of the dissolution.

(Notes 1 & 2) � By a written consent signed by all shareholders entitled to vote on dissolution, in accordance with Section

12,10, board of director action not being required. (Note 3)

� By the shareholders, in accordance with Section 12.15, a resolution having been duly adopted and submitted to the shareholders. At a meeting of shareholders, not less than the minimum number of votes required by statute and by the Articles of Incorporation were voted in favor of the dissolution.

(Note 3) � By the shareholders, in accordance with Section 12.15 and 7.10, a resolution having been duly adopted and

submitted to the shareholders. A consent in writing has been signed by shareholders having not less than the minimum number of votes required by statute and by the Articles of Incorporation. Shareholders who have not consented in writing have been given notice in accordance with Section 7.10.

(Note 3)

(COMPLETE ONLY WHEN APPLICABLE) 4. (a) List all issuances of shares not previously reported to the Secretary of State (including shares issued for cash

or other property, share dividends, share splits, share exchanges pursuant to Section 11.10, and shares to effect an exchange or reclassification of issued shares) and give the value of the entire consideration received therefor, less expenses; list any amounts added or transferred to paid-in capital, without the issuance of shares.

Date of Issuance Number of Entire Consideration or Contribution Class Par Value Shares Issued Received

$

C-152.9 TOTAL $

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13.51


(b) List all cancellations of shares not previously reported to the Secretary of State, and give the cost.

Date of Cancellation Class Number of Shares Cancelled Cost

TOTAL

5. Issued shares at date of execution: Class Series Par Value Number of Shares

6. Paid-in capital at date of execution: Paid-in Capital $

("Paid-in Capital" replaces the terms "Stated Capital" and "Paid-in Surplus" and is equal to the total of these accounts.)

7. The undersigned corporation has caused this statement to be signed by its duly authorized officers*, each of whom affirms, under penalties of perjury, that the facts stated herein are true. (All signatures must be in BLACK INK.)

Dated , 19_ (Exact Name of Corporation)

attested by

by (Signature of Secretary or Assistant Secretary) (Signature of President or Vice President)

(Type or Print Name and Title) (Type or Print Name and Title) *If dissolution is authorized by the incorporators or by the board of directors, a majority of tIem must SIGN HERE.

The undersigned affirms, under the penalties of perjury, that the facts stated herein are true. Dated 19_

NOTES 1. Incorporators are authorized to dissolve a corporation ONLY before any shares have been issued AND before

any directors have been named or elected. The signatures of a majority of the incorporators must appeal on these Articles of Dissolution.

2. Directors are authorized to dissolve a corporation ONLY before any shares have been issued. In the event there are no officers, the signature of a majority of the directors or such directors as may be designated by the board must appear on these Articles of Dissolution.

3. All dissolutions not authorized by the incorporators or the directors must be authorized by the shareholders. Shareholders may authorize dissolution by their unanimous written consent. This does not require any action of the board of directors and does not require a shareholders’ meeting. Shareholders authorization may also be by vote at a shareholders’ meeting or by less than unanimous consent, in writing, without a meeting. To be effective, the dissolution must receive the affirmative vote or consent of the holders of at least 2/3 of the outstanding shares entitled to vote on dissolution and, if class voting applies, then also at least 2/3 of the votes within each class. If the Articles of Incorporation so provide, the 2/3 vote requirement may be superseded by any smaller or larger vote requirement, not less than a majority of the outstanding shares entitled to vote and not less than a majority within each class when class voting applies. When shareholder authorization is by less than unanimous written consent, all shareholders must be given notice of the proposed dissolution action at least five days before the consent is signed. Shareholders who have not signed the consent must be given prompt notice that dissolution was duly authorized.

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B. [13.52] Sample Unanimous Written Consent of Shareholders

UNANIMOUS WRITTEN CONSENT OF ALL OF THE SHAREHOLDERS OF

ABC COMPANY, INC. (an Illinois corporation)

The undersigned, being all of the shareholders of ABC COMPANY, INC., an Illinois corporation (Corporation), do hereby consent to and adopt the following resolutions by unanimous written consent pursuant to §7.10 of the Business Corporation Act of 1983 in lieu of taking such action at a special meeting of the shareholders:

RESOLVED, that the Corporation shall be liquidated in accordance with the plan of liquidation recommended by the Board of Directors, which plan is hereby approved, adopted, and ratified; and

FURTHER RESOLVED, that the president and secretary of the Corporation be, and each of them hereby is, authorized, empowered, and directed, in the name and on behalf of the Corporation, to do or cause to be done all such acts and things as they may deem necessary and proper in order to effect the liquidation of the Corporation in accordance with the plan.

No further actions were taken on this date.

DATED: ’19�.

BEING ALL OF THE SHAREHOLDERS OF ABC COMPANY, INC.

'Copyright 1995 by Horwood, Marcus & Braun Chartered. All rights reserved.

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C. [13.531 Articles of Revocation of Dissolution

The following is Secretary of State Form BCA-12.25, Articles of Revocation of Dissolution. This form must be filed in duplicate with the Illinois Secretary of State along with the required filing fee.

FORM BCA-12.25 ARTICLES OF REVOCATION (Rev. Jan. 1995) OF DISSOLUTION File #

George H. Ryan SUBMIT IN DUPLICATE Secretary of State Department of Business Services This space for use by Springfield, IL 62756 Secretary of State Telephone (217) 782-2353 Date

Remit payment in check or money Filing Fee $ 5.00 order, payable to "Secretary of State." Approved:

1. Corporate name:

2. The Certificate of Dissolution was issued on ’ 19�

3. The corporation has not begun to distribute its assets and has not commenced a proceeding for court supervision of its winding-up.

4. A resolution revoking the dissolution was adopted on 119�

� By a majority of the incorporators, no shares having been issued and no directors having been named in the articles of incorporation nor elected by the incorporators, as of the time this action was taken.

� By a majority of the Board of Directors.

5. The undersigned corporation has caused these Articles of Revocation of Dissolution to be signed in its name by its duly authorized officers, each of whom affirms, under penalties of perjury, that the facts stated herein are true. (All signatures must be in BLACK INK.)

lithe action was taken by the Board of Directors, sign as follows below.

Dated 19_ (Exact Name of Corporation)

attested by by

(Signature of Secretary or Assistant Secretary) (Signature of President or Vice President)

(Type or Print Name and Title) (Type or Print Name and Title)

If the action was taken by the incorporators, a ma.jority of them must sign.

Dated

19 (Corporation Name)

By

C-153.7

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D. [13.54] Sample Notice to Known Creditors

The following notice should be sent to known creditors within 60 days from the effective date of dissolution:

NOTICE OF DISSOLUTION OF ABC COMPANY, INC.

To All Creditors of ABC Company, Inc:

NOTICE IS HEREBY GIVEN that ABC Company, Inc., which maintains its principal office at 123 Main Street, Chicago, Illinois 60601, was dissolved on June 1, 1995. Any claim against ABC Company, Inc., its directors, officers, employees, or agents; or its shareholders or their transferees must be mailed to the ABC Company, Inc., at 123 Main Street, Chicago, Illinois 60601 on or before [date not less than 120 days from the effective date of dissolution].

Your claim must set forth the following information:

FAILURE TO FILE A WRITTEN CLAIM BY THAT DATE WILL RESULT IN YOUR CLAIM BEING BARRED.

ABC Company, Inc.

By:


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13.55

Closely Held Corproations

E. [13.55] Sample Plan of Complete Dissolution and Liquidation

PLAN OF COMPLETE DISSOLUTION AND LIQUIDATION OF ABC COMPANY, INC.

ABC Company, Inc., an Illinois corporation (Company) shall proceed to a complete dissolution and liquidation in accordance with the terms and provisions hereinafter set forth.

1. The Company shall cease transacting business and shall elect to dissolve, wind up its affairs, and voluntarily liquidate upon approval of such action by the requisite vote of the Shareholders.

2. Upon consummation of this Plan of Complete Dissolution and Liquidation, the Officers of the Company shall execute Articles of Dissolution and shall cause the same to be filed with the Illinois Secretary of State. Upon the issuance of the Certificate of Dissolution by the Secretary of State, the existence of the Company shall be terminated, except to the extent that the Company is deemed to continue to exist for any legal purpose to wind up its affairs; prosecute and defend actions by or against it; and otherwise permit and enable it to collect and discharge its obligations, dispose of and convey its property, and collect and divide its assets.

3. After the effective date of the dissolution, the Company shall sell all of its assets on the terms and conditions and for the consideration as the Board of Directors shall determine for the best interests of the Conpany and of its Shareholders.

4. Prior to making any distributions of assets to the Shareholders, the Board of Directors and Officers shall pay all known debts and liabilities of the Company. The Company shall set aside the sum of $________ to be used for the payment of unknown debts, liabilities, and expenses of the Company. .Any amount remaining in the fund after payment of such liabilities and expenses shall be distributed to the Shareholders in accordance with their respective interests.

5. After payment of all of the known liabilities of the Company, the Board of Directors and Officers of the Company shall distribute the remaining corporate assets of the Company to the Shareholders. Distributions, if any, to the Shareholders shall be made in complete cancellation and redemption of all of the outstanding shares of stock of the Company and shall be made in proportion to the rights of said Shareholders to receive such distributions.

6. All share certificates of the Company shall be canceled, and the Shareholders will be required to surrender their share certificates to the Company for retention in the Company’s records.

7. This Plan of Complete Liquidation and Dissolution contemplates a complete liquidation of the Company for purposes of Federal and Illinois income tax laws, by which amounts distributed by the Company, if any, shall be deemed to be in full

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payment in exchange for the shares of stock of the Company to be surrendered by the Shareholder pursuant to §331 and 336 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of the Illinois Income Tax Act, as amended.

8. The Officers and Directors of the Company shall cause the Company to file with the Internal Revenue Service and the Illinois Department of Revenue all forms or reports required to be filed by a corporation in liquidation including, but not limited to, Internal Revenue Service Form 966.

9. The Officers of the Company are hereby authorized, empowered, and directed for, in the name of and on behalf of the Company to make, execute, and deliver any and all documents and instruments and to do and perform any and all acts and things that they shall deem necessary or advisable to fully effectuate and carry out the purposes and objectives of this Plan of Dissolution and Liquidation.


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F. [13.56] Application for Reinstatement

The following is Secretary of State Form BCA-12.45, Application for Reinstatement. This form must be filed in duplicate with the Illinois Secretary of State along with the required filing fee.

FORM BCA-12.45/13.60 APPLICATION FOR REINSTATEMENT OF

(Rev. Jan. 1995) DOMESTIC OR FOREIGN CORPORATIONS I File #

George H. Ryan Secretary of State Department of Business Services

Payment must be made by certified check, cashier’s check, Illinois attorney’s check, Illinois C.P.A.’s check or money order, payable to "Secretary of State."

SUBMIT IN DUPLICATE

This space for use by Secretary of State

Date

Filing Fee $ 100.00

Approved:

1. (a) Corporate name as of the date of issuance of the certificate of dissolution or revocation:

(b) Corporate name as changed: (Note 1)

(c) If a foreign corporation having a certificate of authority under an assumed corporate name restriction, the assumed corporate name: -

(Note 2)

2. State of incorporation:

3. Date that the certificate of dissolution or revocation was issued:

4. Name and address of the Illinois registered agent and the Illinois registered office, upon reinstatement: (Note 3) NOTICE! Completion of item #4 does not constitute a registered agent or office change. See note #3 on back of this form.

Registered Agent First Name Middle Name Last Name

Registered Office Number Street Suite # (A P.O. Box alone is not acceptable)

City Zip Code County

5. This application is accompanied by all delinquent report forms together with the filing fees, franchise taxes, license fee and penalties required.

6. The undersigned corporation has caused this statement to be signed by its duly authorized officers, each of whom affirms, under penalties of perjury, that the facts stated herein are true. (All signatures must be in BLACK INK.)

Dated ’19� (Exact Name of Corporation)

attested by by (Signature of Secretary or Assistant Secretary)

(Signature of President or Vice President)

(Type or Print Name and Title)

(Type or Print Name and Title)

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NOTES

Note 1: If the corporate name which the corporation had at the time of dissolution or revocation is not available for use at the time of reinstatement, the corporation shall set forth the new name by which it will hereafter be known. A change of corporate name must also be properly effected in accordance with the provisions of the Business Corporation Act of 1983. For domestic corporations, articles of amendment must be filed, pursuant to Section 10.30. For foreign corporations, the name must be changed in the state or county of incorporation by articles of amendment filed there, and an application for amended certificate of authority, together with a certified copy of the amendment, must be filed pursuant to Section 13.40.

Note 2: If a foreign corporation’s true name was not available for use when the original certificate of authority was issued, the corporation had to adopt an assumed corporate name for use in Illinois. When reinstating, an application for an assumed corporate name, pursuant to Section 4.15, must accompany the reinstatement application.

Note 3: If either or both the registered agent or the registered office of the corporation has changed since the time of dissolution or revocation, the corporation shall properly report such a change on Form BCA-5.10 or on its most recent annual report form.

Telephone:

Domestic: (217) 782-5797 (217) 785-5782

Foreign: (217) 782-1837

C-89.13

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corporate aspects of dissolution - horwood marcus & … iv: sale or liquidation of a corporation...

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