Under the statutory dissolution scheme in Delaware, corporations have two options to wind up and liquidate their assets: through the “elective” or “default” dissolution procedures. These are also referred to as the “judicial” and “extrajudicial” procedures. The elective procedure is codified under 8 Del. C. § 280 and 281(a), while the default procedure is codified under 8 Del. C. § 281(b).
Comparison of the Elective and Default Dissolution Procedures
The elective and default procedures are very different. Under the former, a corporation must petition the Court for approval of the security set aside, and provide notice of dissolution to potential claimants. Under the default procedure, the corporation does not petition the Court for review of its plan and security, but instead must adopt a plan of distribution through which, among other things, the corporation “shall make such provision as will be reasonably likely to be sufficient to provide compensation” for pending claims and future claims (claims that are likely to arise or become known within 10 years after the date of dissolution). 8 Del. C. § 281(b). The following is a link to a prior post dated September 30, 2013 discussing these dissolution procedures: Dissolution and Winding-Up of Delaware Corporations, (Part II).
Potential Limitation for Director Liability
One 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). However, directors choosing to follow the elective procedure will receive the Court’s stamp of approval through its determination of adequate security.
On the other hand, directors who have chosen the default dissolution procedure will remain subject to claims in the future that they have not adequately complied with Section 281(b)’s requirement of “reasonableness”. Accordingly, following the default procedure may provide a lesser degree of protection to a dissolved corporation’s directors. See In the Matter of Krafft-Murphy Co., Inc., C.A. No. 6049-VCP (Del. Ch. Feb. 4, 2013) (“reliance upon the mechanism of Section 281(b) may present a risky situation for corporate directors regardless of their good faith and due care.”).
Following articles will discuss the extent of potential liability for a director of a corporation following the default dissolution procedure that has not set aside adequate security for pending of future claims.