A recent case decided by the Delaware Court of Chancery is important for any corporation considering a dissolution which will still have liability insurance coverage for years after its dissolution date.
Under Delaware law, a corporation can be sued for three years following the corporation’s dissolution. This period can be extended by the Court, in its discretion.
Regardless of whether a dissolved corporation can be sued, however, the Court can appoint a receiver at any time over a dissolved company with “undistributed assets.” However, that appointment must be for a statutory purpose, such as for the benefit of shareholders and creditors where assets remain undisposed of after dissolution.
The question becomes: does continuing liability insurance coverage constitute “undistributed assets” of a corporation, making it potentially subject to a Court-appointed receiver? This issue was addressed in the recent case of In the Matter of Krafft-Murphy Company., Inc., C.A. No. 6049-VCP (Del. Ch. Feb. 4, 2013). In that case, a group of asbestos claimants, who sued Krafft-Murphy more than ten years after its dissolution, petitioned the Court to appoint a receiver over Krafft-Murphy based on the perceived existence of undistributed assets in the form of liability insurance coverage.
Krafft-Murphy moved to dismiss such lawsuits brought after ten years from its dissolution on the basis that under Sections 280-282 of the DGCL, director liability extends no further than ten years, and accordingly lawsuits filed after this period would not be covered by the policies. Therefore, there were no assets that could be distributed to those claimants, and as such there was no basis for the appointment of a receiver. The Court agreed, and dismissed those lawsuits filed after 10 years from the date of dissolution.
This decision demonstrates that continuing liability insurance coverage of a dissolved corporation does not necessarily constitute “undistributed assets,” which may warrant the appointment of a receiver. Only in those situations where a payout could be made under existing policies would there be a potential basis for the appointment of a receiver over a dissolved company with no other assets.
For a more complete discussion of corporate dissolution and the appointment of a receiver, read our Directors’ and Shareholders’ Reference Guide to Summary Proceedings in the Delaware Court of Chancery.