A Guide for Nonprofit Organizations: Dissolution of Illinois Not For Profit Corporations -- “Involuntary” Dissolution by Administrative Action or Court Order

A Guide for Nonprofit Organizations: Dissolution of Illinois Not For Profit Corporations -- “Involuntary” Dissolution by Administrative Action or Court Order

Last updated: September 2013

(Chapter 3 of Guide to Dissolution of Illinois Not For Profit Corporations)

Administrative Dissolution by the Secretary of State 
Dissolution by Judicial Action Initiated by the Attorney General 
Dissolution by Judicial Action Initiated by a Member or Director 
Dissolution by Judicial Action Initiated by a Creditor 
Judicial Actions in Lieu of Requested Dissolution 

In addition to voluntary dissolution initiated by a corporation's board of directors and/ or its members entitled to vote on dissolution, the corporation may be dissolved "involuntarily," that is, due to actions by persons other than corporation representatives. Such involuntary dissolution may occur through administrative dissolution by the Illinois Secretary of State or by a court acting on the application of the initiative of the Illinois Attorney General, creditors, or individual members or directors of a not for profit corporation.

Choosing to Allow Administrative Dissolution in Lieu of Following Voluntary Dissolution Procedures

Sometimes persons associated with a not for profit corporation that is preparing to cease operations decide to forego filing Articles of Dissolution, preferring to wait until the corporation is administratively dissolved by the Secretary of State for failing to file an annual report. Although this approach appears easy, it has several disadvantages that should be considered. First, administrative dissolution prevents a corporation from controlling the precise timing of dissolution and business wind-up. Moreover, although the corporation's business can be voluntarily wound up before administrative dissolution, the procedure discussed on pages 11-12, (for identifying the pool of corporation creditors and other claimants and barring claims that are not timely asserted) cannot be used until after the corporation has been administratively dissolved.

Further, waiting for administrative dissolution tends to result in more outstanding "loose ends", due to the failure to timely inform creditors and regulators of a corporation's cessation of operations. From the standpoint of directors and senior officers who might be the target of lawsuits by creditors and other persons with claims against the corporation, voluntary dissolution offers greater certainty and the ability to control the timing of the dissolution effective date. However, in cases in which there are no outstanding debts, claims or other activities, or when directors and/ or members are no longer available to approve voluntary dissolution, administrative dissolution does provide a fixed time (generally, not more than 15 –16 months) in which an inactive corporation will be dissolved without the necessity of action by corporate representatives.

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Dissolution by Judicial Action Initiated by a Member or Director

One or more individual member( s) with voting rights, or one or more director( s) of a not for profit corporation, may apply for judicial dissolution on the following grounds:

  1. The directors are deadlocked in the management of the corporation (whether because of even division in the number of directors or because of greater than majority voting requirements in the corporation's articles and bylaws), under circumstances in which the members of the corporation are unable to break the deadlock, and irreparable injury to the corporation is threatened or occurring as a result of such deadlock;
  2. The directors or others in control of the corporation have acted, are acting, or will act in a manner that is illegal, oppressive or fraudulent;
  3. The corporate assets are being misapplied or wasted; or
  4. The corporation is unable to carry out its purposes.

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Dissolution by Judicial Action Initiated by a Creditor

A not for profit corporation's creditors may apply to a court to dissolve the corporation on either of the following grounds:

  1. The creditor's claim has been reduced to a judgment, such judgment has remained unsatisfied, and the corporation is insolvent, or
  2. The corporation has admitted in writing that the creditor's claim is due and owing, and the corporation is insolvent.

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Judicial Actions in Lieu of Requested Dissolution

A court considering a judicial dissolution petition may choose to delay a decision on dissolution and instead appoint a provisional director or a custodian, and allow such person to act in such capacity for a period of time before the court makes a final determination on the dissolution petition.

(1) Appointment of Provisional Director

A court may appoint a provisional director if it appears that such appointment may allow correction of the issue (such as board deadlock) that is the basis for an involuntary dissolution petition submitted by a complaining director or member. A provisional director may be appointed as an additional board member, if there is no current vacancy on the board. Once appointed, the provisional director has all rights and powers of a duly-elected director. The provisional director is required to report back to the court periodically concerning the status of issues that led to the dissolution petition, and other relevant corporate matters. The provisional director can be removed by the court, and also by vote of the number of members of the corporation sufficient to elect a voting majority of the board (although a court may restrict such member removal power in appropriate circumstances).

(2) Appointment of Custodian

As is the case for provisional directors, a court may appoint a custodian if it appears that such appointment may allow correction of the issue that is the basis for an involuntary dissolution petition submitted by a complaining director or member. Once appointed, the custodian becomes empowered to assume responsibility for management of the corporation, in place of the board of directors and executive staff. The custodian will be entitled to exercise such management powers (directly or through the board or management staff) to the extent necessary so as to manage the corporation's affairs to the general advantage of its creditors and in furtherance of its corporate purposes. The custodian can be removed by the court, or by vote of the number of members sufficient to elect a voting majority of the board (unless the court restricts such member removal power). The custodian must report to the court periodically. If the custodian determines that the corporation cannot survive financially or should be dissolved for other reasons, s/ he may so recommend to the court.

(3) Court Action to Approve Dissolution

If the court determines that the appointed provisional director or custodian is unable to remedy the problems that had resulted in the dissolution petition, the court will then grant the dissolution petition, and may appoint a receiver to liquidate the corporation's assets, pay and provide for outstanding debts and liabilities and otherwise "wind up" the corporation. Such winding-up will include providing notice to creditors pursuant to the procedures set forth on page 12. I above. The court will retain jurisdiction over the corporation until the liquidation and winding-up process is complete.

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