In the prior post, a discussion was provided regarding the limitation of liability of directors of a dissolved corporation following either the “elective” or “default” dissolution procedures.  This article will discuss whether the statutory scheme implicitly provides a cap on director liability of a corporation that fails to set aside an adequate reserve.

As discussed previously, an implication of following either the elective or default dissolution procedures is the potential for director liability.  Under either the default or elective procedure, the potential liability of directors of the dissolved corporation will be limited if the procedures are properly followed.  See 8 Del. C. § 281(c) (providing that directors of a dissolved corporation will not be personally liable to the claimants of the dissolved corporation if the corporation has complied with either the elective or default procedure).

Implicit Capping of Director Liability?

Interestingly, neither the DGCL, nor applicable case law, indicates to what extent a director could be liable for not providing an amount of security “reasonably likely to be sufficient” to cover future claims.  No Delaware decision to date has addressed whether director liability resulting from a failure to provide assets “reasonably likely to be sufficient”, in connection with the default dissolution procedure of the DGCL, would be capped by the value of the assets distributable at the time of dissolution of the company.

However, because Section 281(b) of the DGCL contemplates that a dissolving company with insufficient assets may pay its creditors according to their priority, and ratably among claims of equal priority, it is possible that director liability under the default dissolution procedure could be capped by the amount of assets available to be distributed.  See 8 Del. C. § 281(b); see also In re RegO Co., 623 A.2d 92, 106 (Del. Ch. 1992) (“Section 281(b) must mean that a corporation in dissolution which cannot both pay its present creditors and make adequate provision for contingent and future claims, and which follows the Section 281(b) procedure, is directed not to pay its current creditors in full but to pay them ratably.”).

This potential capping of liability, however, would likely not extend to liability relating to fraudulent and/or unlawful transfers made by the dissolving company prior to dissolution, pre-dissolution breaches of fiduciary duties of such directors, or any other liability not associated with the dissolution of the company pursuant to Section 281(b).

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.