Journal of
Corporate
Renewal
October
2016
an individual creditor deciding not to
participate at the expense of creditors
willing to compromise their claims.
As compared to a Chapter 11 plan, a
composition agreement is a relatively
inexpensive alternative that, if
successful, permits the company to
remain a going concern on firmer
financial footing. A typical composition
agreement contains, among other
things: (i) recitals setting forth that the
debtor is not able to pay its creditors in
full; (ii) a statement that a compromise
is in the best interests of the debtor and
creditors; (iii) provisions categorizing
the classes of covered creditors and
terms of repayment; (iv) an effective
date, usually keyed off acceptance
by the required number of creditors;
(v) provisions for the treatment of
disputed claims; (vi) a moratorium on
adverse creditor action for a defined
period of time before the effective
date and, so long as there is no
default, after the effective date; and
(vii) an enforcement mechanism.
The composition agreement thus may
bear many hallmarks of a Chapter 11
plan, including a contractual version of
the automatic stay and plan injunction,
along with numerous confirmation
requirements, but with less expense
than is typical of bankruptcy.
Unlike a Chapter 11 confirmation
order, the composition agreement is
a contract that cannot be judicially
imposed, bind third parties, or
eliminate a participant’s decision
to “defect.” Nevertheless, for the
proactive distressed company with
a small and cooperative creditor
body, a composition may provide
significant “bang for the buck” and,
if it is unsuccessful, bankruptcy
remains a viable option.
Long-Form
Delaware Dissolution
The final non-bankruptcy alternative
discussed in this article is the
Delaware long-form dissolution. A
dissolution is governed by Subchapter
X of the Delaware Corporations Law.
Eligibility is limited to Delaware
corporations and cannot be used
by limited liability companies
(LLCs), partnerships, or other non-
corporations. Accordingly, to take
advantage of a dissolution, a troubled
company might have to change its
state of organization and/or convert
to a corporation, options that may not
be available for a variety of reasons.
As noted, bankruptcy has become too
costly and cumbersome for use by
many distressed companies to wind
down their businesses in an orderly
fashion. For a Delaware corporation
that must liquidate, a dissolution may
provide much of the relief available in
bankruptcy at a significantly reduced
cost with the comfort of formal
oversight by the Court of Chancery. The
initiation of a dissolution is relatively
straightforward: the corporation’s
shareholders authorize the company
to file a petition for dissolution with
the Chancery Court either before or
after providing notice to its creditors
of its intent to dissolve, as provided for
by statute. Upon signifying its intent
to dissolve, the company ceases all
operations and effectively cuts off
the accrual of additional liabilities.
The creditor notice is similar to a
bankruptcy bar date, for which a
creditor who receives actual notice
must timely assert its claim or have
its later enforcement barred by
statute. Because only creditors who
receive actual notice can have their
claims barred, it is incumbent that
the company identify in advance all
of its creditors, including potential
and contingent creditors, to take full
advantage of the statute. Once a timely
claim is received, the company may
“reject” it, i.e., object to it, and the
burden is on the creditor to file suit
in a court of competent jurisdiction
within 120 days of the rejection to
defend its claim. Failure to do so
results in the claim being barred.
Dissolution also provides a statutory
mechanism for dealing with disputed
and/or contingent obligations through
the provision by the debtor of “security”
in the event the claim is ultimately
upheld. This procedure is similar
to establishing a disputed claims
reserve in a bankruptcy case, though
a creditor who fails to object to the
form or amount of security offered
by the dissolved company is deemed
to have accepted such security in full
satisfaction of its claim. When the
claimant objects to the form or amount
of security, the claim may be liquidated
by the Chancery Court. Again, the
benefits of dissolution are apparent
by shifting the burden of asserting
and prosecuting claims at the risk of
being barred onto the creditor. Once
the pool of allowed claims is finally
determined, the dissolved company
pays its creditors their pro rata share
and any surplus to its shareholders.
Another powerful benefit of a
dissolution is statutory immunity from
personal liability for directors who
adhere to all dissolution requirements
with respect to the treatment of
claimants. In other words, unless a
prepetition claim for personal liability
is properly asserted by a claimant in
the dissolution proceeding, that claim
cannot subsequently be brought once
the dissolution is consummated. This
statutory immunity is unique when
compared to the other alternatives
discussed in this article and provides
the director of a failed corporation
with a level of comfort that may make
a dissolution the preferred option for
those companies that must liquidate
but do not want the imposition of
an independent Chapter 7 trustee.
Although consummation of the
dissolution effectively discharges the
corporation’s obligations, the Delaware
statute provides that the corporation
must remain in legal existence for
a minimum of three years (which
may be extended by order of the
Chancery Court) in the event there is
a need to reopen the proceedings. At
the end of this statutory period, the
corporation’s officers and directors are
deemed to no longer have authority
to act in the name of the corporation,
and a creditor or other stakeholder
seeking redress may petition the
Chancery Court to appoint a receiver
to act for the dissolved corporation.
The benefits of a dissolution
for the eligible debtor include
reduced wind-down costs, a
well-developed statutory regime,
judicial supervision that promotes
certainty, a debtor-friendly claims
resolution process, and ultimately
director immunity from personal
liability. In this sense, a dissolution
comes closest to the procedures and
protections of bankruptcy but with
fewer procedural and substantive
requirements and generally on a
more truncated time frame.
Weighing Options
As reorganizations or orderly
liquidations under the Bankruptcy
Code have become more costly and
time-consuming for a distressed
company, state law alternatives may be
more appropriate to address balance
sheet woes or provide for an orderly
