A corporation, like a natural person, can come to an end, and the process has two stages: dissolution (the termination of the corporate existence for the purpose of doing further business) and liquidation (the winding up of its affairs, settling debts, and distributing remaining assets). Under the Revised Corporation Code, dissolution may be voluntary or involuntary. Voluntary dissolution occurs by the act of the corporation itself: where no creditors are affected, through a majority vote of the board and the approval of the stockholders or members, and a request or notice to the SEC; where creditors are affected, through a more formal process with notice, hearing, and SEC approval; and, notably, a corporation may also be dissolved by shortening its corporate term through an amendment of the articles of incorporation. Involuntary dissolution occurs by order of the SEC (or a court) on grounds provided by law, such as fraud in procuring the certificate of incorporation, serious misrepresentation, continuous inoperation, or other violations, upon a verified complaint and due process. After dissolution, the corporation continues as a body corporate for a limited period, generally three years, for the purpose of winding up its affairs, that is, prosecuting and defending suits, settling and closing its affairs, disposing of and conveying its property, and distributing its assets, but not for continuing the business for which it was established. In liquidation, the assets are applied in order: first, to pay the corporation's creditors and liabilities; and then, whatever remains is distributed to the stockholders (or members) according to their respective interests, generally in proportion to their shareholdings, after which the corporation is finally terminated. A trustee or receiver may be appointed to complete a liquidation that extends beyond the three-year period. So a corporation ends through voluntary or involuntary dissolution, followed by a limited winding-up period in which its debts are paid and remaining assets distributed to the stockholders.
Two Stages
A corporation ends in two stages: dissolution (terminating its existence for doing further business) and liquidation (winding up, settling debts, distributing assets).
Voluntary vs. Involuntary Dissolution
- Voluntary — by the corporation: board + stockholder vote and SEC notice (no creditors affected), a formal process (creditors affected), or shortening the corporate term; and
- Involuntary — by SEC/court order on legal grounds (fraud, misrepresentation, continuous inoperation).
Winding Up and Asset Distribution
After dissolution, the corporation continues for a limited period (generally three years) only to wind up. In liquidation, assets pay creditors first, then the remainder goes to stockholders per their shareholdings. A trustee/receiver may finish a liquidation beyond three years.
Practical Takeaways
- Dissolution is voluntary (by the corporation) or involuntary (by SEC/court);
- A dissolved corporation has ~3 years to wind up;
- Liquidation pays creditors first, then stockholders.
Frequently Asked Questions
What is the difference between dissolution and liquidation? Dissolution is the termination of the corporation's existence for the purpose of doing further business. Liquidation is the subsequent winding up of its affairs, settling debts, and distributing remaining assets to the stockholders.
How can a corporation be dissolved? Voluntarily, by the act of the corporation through a board and stockholder vote with SEC notice or approval, or by shortening the corporate term. Involuntarily, by order of the SEC or a court on legal grounds such as fraud or continuous inoperation.
How long does a dissolved corporation have to wind up? Generally three years from dissolution, during which it continues as a body corporate solely to wind up its affairs, settle its debts, dispose of its property, and distribute its assets, not to continue its business.
In what order are corporate assets distributed on liquidation? First to pay the corporation's creditors and liabilities, and then whatever remains is distributed to the stockholders according to their respective interests, generally in proportion to their shareholdings.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
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