10.2 Statutory Remedies: Corporate Dissolution and Appointment of a Receiver to Satisfy a Creditor’s Claim

• Library: Enforcement of Liens and Judgments in Virginia (Virginia CLE) (2019 Ed.)

10.2 STATUTORY REMEDIES: CORPORATE DISSOLUTION AND APPOINTMENT OF A RECEIVER TO SATISFY A CREDITOR'S CLAIM

10.201 In General.

A. Before the Statute. Before the promulgation of section 3813 of the Virginia Code in 1919, no statute provided a general creditor a remedy for obtaining judicial supervision of an insolvent corporation. ²⁹ Consequently, a creditor was forced to obtain a judgment and an execution nulla bona and thereafter proceed in equity under a creditors' bill in order to seek appointment of a receiver. ³⁰ The remedy was unavailable to general unsecured creditors, who were relegated to their right to seek judgments and execute against legal (as opposed to "equitable") assets. ³¹

B. Section 3813 of the Virginia Code. In 1919, the corporation laws were amended to grant certain creditors a statutory remedy to enforce claims against corporations by seeking dissolution. To further liquidation after dissolution was ordered, the statutes provided that a receiver could be appointed. To preserve

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the status quo pending a decision on dissolution, the statute provided that a custodian, or receiver pendente lite, could also be appointed.

10.202 Present Statutory Provisions.

A. Section 13.1-747(A)(2) the Virginia Code.³² This statute provides that a court may involuntarily dissolve a corporation:

2. In a proceeding by a creditor if it is established that:

a. The creditor's claim has been reduced to judgment, the execution on the judgment 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.

B. Custodian. section 13.1-747(E) provides for the appointment of a receiver (custodian) pendente lite during the pendency of the dissolution action.

A court in a proceeding brought to dissolve a corporation may issue injunctions, appoint a receiver or custodian pendente lite with such powers and duties as the court may direct, take other action required to preserve the corporate assets wherever located, and carry on the business of the corporation until a full hearing can be held.

C. Receiver to Effect Dissolution Decree. section 13.1-748 also provides for the appointment of a custodian pendente lite and for appointment of a permanent receiver to wind up the corporation's affairs after dissolution is ordered. ³³

D. Standing of Creditor to Seek Dissolution.

1. Who May Seek Dissolution. Only certain creditors have statutory standing to move for the dissolution of a corporation. ³⁴ Only two types of creditors have standing to seek dissolution of an insolvent corporate debtor.

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a. Creditor with an Unsatisfied Judgment. A creditor with an unsatisfied judgment after execution is returned nulla bona may seek dissolution if the corporation is insolvent. ³⁵ This provision parallels the creditors' suit in equity.

b. Unsecured Creditor. Section 13.1-747(A)(2)(b) permits an unsecured creditor to seek dissolution of the corporation if the corporation admits in writing that the creditors' claim is due and owing and the corporation is insolvent. The Supreme Court of Virginia has stated that "[i]t is well settled law that a general creditor cannot file a bill of equity to enforce a claim against a living person or a corporation which is a going concern, unless he has first obtained a lien upon the property, except where otherwise provided by statute." ³⁶ Section 13.1-747(A)(2)(b) is just such a statute.

2. Admission of Debt and Insolvency. Although the syntax of the statute is unclear, it appears that the writing must admit not only the debt, but also the insolvency. The Commentary to the Model Business Corporation Act (MBCA), on which Virginia's judicial dissolution statutes are based, is unenlightening on the point. Some states have adopted a form of the statute that specifies that only admission of the debt must be in the writing. ³⁷ The Bankruptcy Act of 1898, which preceded the adoption of the Bankruptcy Code, stated that an "act of bankruptcy" (the so-called "sixth" act of bankruptcy) included a writing admitting both the debt and the debtor's willingness to be adjudged a bankrupt. ³⁸

The Bankruptcy Act of 1898 appears to express most nearly the meaning of this section. Courts have long cast a wary eye on unsecured creditors seeking to invoke equity jurisdiction to pursue debtors, and it is unlikely that the drafters of the MBCA or the Virginia corporation laws intended to thoroughly renounce traditional jurisprudence relating to debtor-creditor law. Requiring the creditor to show merely that its debt is admitted as a precondition to commencing so drastic a remedy as dissolution defies logic.

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The leading treatise on the Bankruptcy Act ³⁹ provides insight into the logic of requiring a debtor to acknowledge its willingness to be adjudged a bankrupt (the equivalent of admitting insolvency under the Virginia statute), since the "act of bankruptcy" embodied in section 77B of the Bankruptcy Act derived from the fact that, before 1910, corporations were prohibited from voluntarily commencing bankruptcy proceedings. The "sixth act of bankruptcy" was a device to permit a corporation to engineer an involuntary case in collusion with some of its creditors, not to permit creditors an easier path to bankruptcy court. Though the debtor could not file a bankruptcy petition, it could execute a writing allowing the creditors to file an involuntary petition against it. ⁴⁰ The bar on filing a voluntary bankruptcy petition that existed until 1910 still has its counterpart in equity, which does not permit receiverships except on motion of creditors. In this context, it appears that section 13.1-747(A)(2) of the Virginia Code, its predecessor, and its MBCA counterpart were designed to create an opportunity for corporations to volunteer for an involuntary dissolution and accompanying receivership. To avail itself of the opportunity and not be drawn into proceedings merely on the strength of an unpaid debt, the corporation had to admit its insolvency in writing.

E. Effect of the Pre-Dissolution Termination of Corporate Existence. A creditor or other party in interest may move for judicial liquidation of the remaining assets of a corporation whose corporate existence has already been terminated. ⁴¹ Although this is not an action to dissolve per se, a liberal reading of sections 13.1-747(E) and 13.1-748 supports appointment of a receiver in such cases.

10.203 Insolvency.

A. Requirement. Under section 13.1-747(A)(1) of the Virginia Code, the corporation must...