|Guide to Dissolution of Illinois Not For Profit Corporations -- “Involuntary” Dissolution by Administrative Action or Court Order||
Last updated: December 2004
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.
(1) Reasons for Administrative Dissolution. The Act permits the Secretary of State to dissolve a not for profit corporation administratively (that is, without requiring a judicial hearing) for any of the following reasons:
(a) Failure to file the corporation's annual report;
(b) Failure to file any other report required to be filed with the Secretary of State;
(c) Failure to appoint and maintain a registered agent in the State; and
(d) In the case of corporations organized as a not-for-profit club, for retail sale of alcohol without a retailer's license.
(2) Notice of Delinquency and Prospective Dissolution. If the Secretary of State determines that one or more of the reasons set forth above for administrative dissolution of an Illinois not for profit corporation are present, the Secretary must attempt to notify the corporation by mailing a Notice of Delinquency to the corporation's registered office, or if there is no known registered office, to the president or another principal officer at such officer's last-known office (as shown on the Secretary of State's records). Note: Since one of the common factors resulting in administrative dissolution are inattention of the registered agent or change of address of the corporation and/ or its registered office, a corporation that did not receive its annual report form because it was sent to an old address is also likely to not receive a Notice of Delinquency warning of an impending administrative dissolution. Thus, a corporation may have been administratively dissolved for some time before the officers of the corporation discover the problem.
If a corporation does not correct the failure that led to the Notice of Delinquency within 90 days after the Delinquency Notice was sent, the Secretary of State will dissolve the corporation administratively, by issuing a Certificate of Dissolution, one copy of which is mailed to the corporation at its last-known registered office address. The administrative dissolution will also be reflected on all Secretary of State records, including its website listings of Illinois corporations.
(3) Effect of Administrative Dissolution. Administrative dissolution has the same legal effect as voluntary dissolution described above. However, if the corporation is subsequently reinstated as set forth in subsection (4) below, the corporation's existence will also be retroactively reinstated for all purposes. If a corporation has been administratively dissolved and it is either not possible or desirable to reinstate the corporation's good standing and existence, the corporation's affairs should be wound up, its assets liquidated and all debts and obligations paid or otherwise satisfied. In particular, it is beneficial to go through the notice to creditors process described above in Section II. I. Such process provides the benefit of forever barring claims of creditors who do not respond during the required notice period.
(4) Reinstating a Corporation that Has Been Administratively Dissolved. A corporation that has been administratively dissolved may reinstate its corporate existence within 5 years from the date of the Secretary of State's issuance of a certificate of dissolution. To accomplish reinstatement, the corporation must file with the Secretary of State an application for reinstatement (see current form of such application at Appendix A-3), as well as all corporate annual and other reports due and outstanding. Such fillings must be accompanied by payment of all outstanding fees and penalties; the Secretary of State's office can advise what filings, fees and penalty payment need to be filed with the reinstatement application. It is possible that a dissolved corporation seeking reinstatement may discover that its former corporate name has been taken by another corporation. In such cases, unless the other corporation agrees to give up such name, the dissolved corporation will need to choose a different name for the corporation once it is reinstated. Once reinstatement occurs, the dissolution is treated as never having occurred. Therefore, all acts taken by the corporation after the administrative dissolution but prior to reinstatement are deemed after reinstatement to have been the legal acts of a corporation in good standing.
(5) 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 in Section II. I above, (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.
Involuntary dissolution of a not for profit corporation may also as a result of judicial action initiated by the Illinois Attorney General. The grounds upon which the Attorney General may sue for dissolution of an Illinois not for profit corporation are the following:
(1) The corporation obtained its certificate of incorporation through fraud;
(2) The corporation has continued to exceed or abuse the authority conferred upon it by law, or has continued to violate the law, after notice of such excess, abuse or violation has been given to the corporation by personal delivery or registered mail;
(3) An interrogatory [i. e., a list of questions] submitted by the Secretary of State to the corporation, its officers or directors, has been answered falsely or has not been answered fully within 30 days after the mailing of such interrogatories (or any longer period of time granted by the Secretary of State);
(4) The corporation has fraudulently solicited money, fraudulently used money solicited, or failed to use solicited money for the purpose for which it was solicited; or
(5) The corporation has substantially and willfully violated the provisions of the Consumer Fraud and Deceptive Business Practices Act.
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.
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.
A court considering an involuntary 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 provide notice to creditors pursuant to the procedures set forth in Section II. I above. The court will retain jurisdiction over the corporation until the liquidation and winding-up process is complete.
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