Voluntary Dissolution, Administrative Dissolution, And Winding Up

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 594-601

§ 26.1 Voluntary Dissolution Versus

Informal Liquidation

Voluntary dissolution of a corporation involves two legal steps: (1) the

dissolution itself, which involves the termination of the corporate exis-

tence, at least as far as the right to continue doing ordinary business is

concerned, and (2) the winding up of affairs, payment of debts, and dis-

tribution of assets among t he shareholders. Winding up may precede or

follow the dissolution, depending on the jurisdiction’s statutory proce-

dures. For convenience in winding up, t he corporate existence is usu ally

continued either indefinitely or for some period limited by law in order

to dispose of the corporation’s assets and pay creditors.1 This enables the

directors to fu nction as a board with title in the corp oration rather than

as trustees of the liquidation process.

The pre-1984 Model Business Corporation Act provided a two-

step process to dissolve. First, a statement of intent to dissolve that has

been approved by the shareholders is filed with the secretary of state.

Additionally, notice of the intent to dissolve must be given to known

creditors during this step. Second, when the winding up process is

completed, the articles of dissolution must be filed. The secret ary of state

then issues a certif icate of dissolution and the corporation is dissolved.2

The current Model Business Corporation Ac t and a clear majority of the

states have simplified the process by requiring only that the articles of

dissolution to be filed, with the dissolution becoming effective as of the

date of the filing.3

A corporation’s legal existence terminates only when it is dissolved

by legal authority, expires by limitation of its term of existence, or is

dissolved by forfeiture.4 Although it is not a formal dissolution, an

informal liquidation may occur by sale of all the corporate assets,

the abandonment of corporate activities, and the distribution of the

corporation’s property among the creditors and shareholders. This is

sometimes referred to as a practical or de facto dissolution. However,

a liquidation of assets does not terminate the corporate existence as a

matter of law.

There may be reasons for retaining a corporation as a shell, such

as for reactivation at a later date or for use in a corporate merger or

consolidation. Directors and shareholders should follow the proceed-

ings prescribed by law for voluntary dissolution and the winding up

process; otherwise, the directors and shareholders risk liability due to

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