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Seeking Corporate Dissolution: One Way to Turn Up the Heat on a Deadbeat Debtor

Put yourself in the place of a creditor. One of your customers, an Illinois corporation, owes you money. The customer does not dispute the debt and has even admitted it in writing. However, you can't get the customer to pay. You have tried everything. First, you are told "the check is in the mail" and of course, it does not show up. The customer then agrees to a payment plan but fails to make the required payments. Finally, the customer promises to "pay next month when we have the money." Still no check. In a last ditch effort, you call repeatedly, but the customer has now gone incommunicado. It has become obvious that the only way to collect the debt is to file a lawsuit.

You are hesitant, however, because of the time and expense it will take to obtain and enforce a judgment. After all, the customer will likely go to great lengths to delay the lawsuit and hold you at bay for as long as possible. From the customer's point of view, the worst case scenario is that it will have to pay you the money it has already admitted it owes. Is there anything you can do to minimize the time and expense of obtaining and enforcing a judgment?

You may want to consider a seldom-used remedy that can significantly increase your chances of recovering a debt. Under the Illinois Business Corporation Act, a creditor may seek to have its claims against an Illinois corporation satisfied by bringing an action for dissolution in the state's circuit court. By adding a cause of action for corporate dissolution to a collection lawsuit, creditors may increase pressure on the debtor to pay what is owed or resolve the dispute in a timely, cost-effective manner. In essence, this alternative remedy can change the dispute from a simple beach of contract or collection matter to a scenario where the customer risks losing control of the corporation and must fight for its very existence.

The Illinois Business Corporation Act, which has little case law interpreting it, does not require much. The statute provides that in an action brought by a creditor, a circuit court in Illinois may dissolve a corporation if it is established that:

  1. The creditor's claim has been reduced to judgment, a copy of the judgment has been returned 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.

(Note: Many other states have similar statutes that allow a creditor to satisfy a claim against a corporation through dissolution or liquidation. Accordingly, if your customer is not an Illinois corporation, you should check to see if its state of incorporation has a similar statute.)

One advantage of using this statute is that it does not actually require a creditor to obtain a judgment. The creditor need only show that the debtor has admitted in writing that it owes the money and that the corporation is insolvent. The written admission can come in a variety of forms. For example, the debtor may have sent a letter or e-mail admitting that it owes the debt or may have acknowledged the debt in a forbearance or settlement agreement. In addition, the admission need not be made directly to the creditor. According to People Ex Rel. Day v. Progress Ins. Ass'n, a 1955 Illinois Appellate Court decision, it may be sufficient that the indebtedness is recognized in the debtor's books and records. Furthermore, the insolvency requirement is satisfied if the corporation is "unable to pay its debts as they become due in the usual course of its business," as stated in the Illinois Business Corporation Act.

The statue also allows the circuit court, as an alternative to dissolution, to (1) appoint a custodian to manage the business and affairs of the corporation to serve for the term and under the conditions prescribed by the court; and (2) appoint a provisional director to serve for the term and under the conditions prescribed by the court. Like the prospect of dissolution itself, these alternatives put the debtor at risk of losing control of the company.

While your customer may be willing to take the chance that a judgment will be entered against it after extensive litigation and delay, it may not be willing to risk dissolution or loss of control of the corporation. Therefore, adding a count for corporate dissolution to a collection lawsuit can alter the playing field and give you—the creditor—significant negotiating power to resolve the dispute quickly and on better terms.  

© 2022 Much Shelist, P.C.National Law Review, Volume I, Number 257
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About this Author

Jeff Schwartz, bankruptcy attorney, Much Shelist law firm
Principal

Jeffrey M. Schwartz, a Principal in the firm's Creditors' Rights, Insolvency & Bankruptcy group, focuses his practice on the representation of secured and unsecured creditors in business reorganizations under Chapter 11 of the Bankruptcy Code and in out-of-court restructurings. He also represents buyers and sellers of financially distressed companies and distressed debt, and regularly advises lenders, creditors' committees, indenture trustees, debtors and other parties involved in bankruptcy-related matters. 

312-521-2626
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