Judicial Dissolution as Your Last Resort

Posted on November 12, 2008

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Push is coming to shove more and more often within our small to medium-sized business clients in this tough economic environment. As a result, we hear the dirty words “judicial dissolution” thrown around often and haphazardly.

For those who are unfamiliar with judicial dissolutions, the Alabama Code (and most other states) allows a company to be dissolved and the company’s assets to be distributed if the directors (or managers in an LLC) are deadlocked as to the management of company affairs, such that the company can no longer continue. This process is typically only pursued when the company’s management or shareholders have irreconcilable differences. I’ve witnessed judicial dissolutions threatened in several contexts, but I rarely see a director/manager actually get to the point of filing such a petition with a court. My general observation is that asking a court to oversee the pro rata distribution of company assets is an unnecessary, time consuming and expensive affair that should be avoided to the extent possible.
However, the following are some of examples where I have seen judicial dissolutions actually filed: 

  1. Where one manager of an LLC allegedly stole cash from the company and the other managers filed to dissolve the company to ascertain what assets were left; however, by the time the case approached the first hearing date, the company had lost too much money to bother proceeding with dissolution. In this instance, the company was ultimately “administratively dissolved,” meaning that it was dissolved as it sat dormant because no one paid the company’s state income taxes.
  2. Where the managers agreed the company had to be dissolved, but they could not agree on the way the physical assets that the company had accumulated over the course of several years would be valued and divided; and
  3. Where the management had personal differences to the point that they could no longer work together, and one of the managers wanted to continue the business.

More often than not, if the parties have reached the point of filing a judicial dissolution, there are other claims involved as well. These claims may be brought by third parties, but typically where there is a judicial dissolution, claims are brought derivatively “by and through” the company for breach of fiduciary duty/ breach of duty of care. In these cases, the court is tasked with the complex process of hearing claims for damages against the offending managers and then liquidating the company and distributing its assets. 

From my experience, the cost of litigating a judicial dissolution is almost always prohibitive. If they exist, your derivative claims can be separated, and hopefully cooler heads prevail with respect to the distribution of assets. It is telling that when I filed my first Petition for Judicial Dissolution, neither the court nor the presiding judge knew the proper filing fee. This tells me that cooler heads typically do prevail, keeping judicial dissolutions out of play most of the time. 

Brice Johnston, Goodrich Law Firm, LLC

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