Hey Director: Think Twice Before Dissolving

One word of advice for a corporate director who sits on a board of a faltering corporation that is considering dissolving before the end of the year: resign. And do so long before the vote to dissolve. That’s because directors of California corporations may have personal liability following the dissolution.

California law imposes personal liability on shareholders of dissolved corporations for four years following the corporate dissolution.  See, http://www.eminutesonline.com/zombie-corporations-in-california-personal-liability-lives-on-for-four-years-after-corporate-dissolution/.  But the liability of the shareholders is limited to the amount the shareholder actually received at the time of the dissolution.

Unlike shareholders, even directors who receive nothing whatsoever at the time of dissolution are personally liable (jointly and severally with the corporation) if they approve the distribution of assets to shareholders without first satisfying the liabilities of the corporation that are known at the time of dissolution. See, California Corporations Code Section 316(a)(2).   California law provides that the director is personally liable up to the amount of the illegal distribution (or if the illegal distribution consists of property, the fair market value of that property at the time of the illegal distribution) plus any accrued interest  from the date of the distribution, together with all reasonably incurred costs of appraisal or other valuation, if any, of that property or loss suffered by the corporation as a result of the improper distribution. See, California Corporations Code Section 316(C).

The moral of the story: be very careful if you are a director of a corporation considering dissolution, especially when the corporation intends to dissolve without providing for all of its debts.