As businesses grow, their legal entity organizational charts often grow as well. While subsidiary entities are created for specific purposes, there may come a time when they no longer serve those purposes. It is not uncommon for a company to have a subsidiary in its organizational structure that is, for all intents and purposes, a zombie or walking dead operationally inactive and financially insolvent, but still in existence from a legal standpoint. Private equity funds often face the same issue with companies in their portfolios.
There are several options available to a company or fund to deal with and dissolve entities that have no ongoing value. One is bankruptcy, which has its benefits but also drawbacks. The expense, look back provisions under Chapter 5 of the Bankruptcy Code, potential claims against officers and directors, and long timelines driven by the Bankruptcy Code requirements can cause a seemingly simple attempt to bury a company into an administrative nightmare. Typically, the best course of action is to wind down and dissolve a corporation under state law.
Inactive subsidiaries and portfolio companies continue to incur costs and pose legal risks as they remain in a state of limbo. Entities that fail to remain in good standing may incur penalties in some states. Tax returns need to be filed. Outstanding tax liabilities will continue to accrue interest. Portfolio managers who served as passive officers and directors may be unaware of lurking claims that could arise against them. Additional creditors may surface over time. The IRS provides a checklist of steps that need to be completed to close a business. As the IRS states, Closing your business can be a difficult and challenging task.
As long as a corporation exists, whether it is active or not, there are risks that it will incur additional liabilities over time some of which may become liabilities of the parent company or fund and certain executives of the corporation.
Corporate dissolutions are done according to state law. For example, in Delaware, a corporation can be dissolved through a process that takes place outside of court (a non-safe harbor dissolution) or one that involves court supervision (a safe harbor dissolution). As you might expect, the court-supervised process tends to be more costly and time-consuming but offers more protection for shareholders, officers, and directors against creditor claims.
While every states laws are different, corporate dissolutions often take place without any court supervision. In some instances, however, the dissolution process may be overseen by a court at an interested partys request. For instance, in California, a court may take jurisdiction over the winding up of a corporation upon petition of: (i) the corporation; (ii) shareholder(s) holding at least 5% of the outstanding shares; (iii) any shareholder of a close corporation; or (iv) three or more creditors. Even if a request is made, a court may decline to accept jurisdiction.
In short, because every states laws vary, the decision to dissolve under state law, file for bankruptcy, or pursue some other alternative for winding up a corporations affairs will depend on individual facts, circumstances, and governing law. As opposed to a bankruptcy, a wind-down tends to be a good option when a corporation has relatively few creditors and a low likelihood of future contingent liabilities (such as environmental or product liability issues).
If it is determined that the dissolution of a subsidiary or portfolio company under state law is the right path forward, the state statute will provide the appropriate road map. Typically, outside advisers will be tapped, including a consultant and legal counsel, to help navigate the process. A consultant may serve in one of several roles, including a trustee for a wind-down trust established to administer assets and liabilities, as a board member, or as an adviser to the board during the wind-down process.
In some cases, to the extent permitted by an entitys organizational documents, it may be advisable for other board members or managers to resign to limit potential personal liability exposure during the wind-down.
However, even after a companys control has transferred to a new board or fiduciary under a wind-down, the former executives may remain exposed to various legal claims or personal liability. If a court supervises a wind-down, a consultant can serve as a receiver or assignee under an assignment for the benefit of creditors to oversee the process and serve as an intermediary between the court and the company.
The specific steps involved in the wind-down process vary by state but generally involve:
It is rarely a good idea to keep an operationally inactive company on the books. Rather than waiting for an unwelcome surprise from the IRS relating to an unpaid tax liability from years past, or an unknown creditor petitioning a court to force a dissolution or involuntary bankruptcy, it is far easier and less costly be proactive.
Given the economic challenges caused by the COVID-19 pandemic, more businesses will be experiencing financial distress. Bankruptcy is not always the best or even a viable option and neither is biding time.
Gene Kohut is a managing director and leads the fiduciary services practice at Conway MacKenzie, a part of Riveron. He serves as a receiver, assignee, chapter 11 trustee, liquidating trustee, and chief restructuring officer in bankruptcy, restructuring, and turnaround cases.
Read the original post:
Don't Wait to Wind Down 'Zombie' Subsidiaries - CFO
- Indias zombie home fund set to deliver thousands of apartments - The Real Deal - February 20th, 2021
- Zombie infection threat as country unlocks 50,000-year-old viruses - Yahoo News Australia - February 20th, 2021
- Stubbs the Zombie rises from his grave this March for PC via Steam - PC Invasion - February 20th, 2021
- Zombie Hit Train To Busan Is Getting A US Remake - GameSpot - February 20th, 2021
- Rob Zombie says the meat industrys future is unsustainable - NME.com - February 20th, 2021
- Stubbs The Zombie In Rebel Without A Pulse - Yahoo Entertainment - February 20th, 2021
- Batista Wanted To Play A Zombie On The Walking Dead, Rejected For Being "Too Big" - Fightful - February 20th, 2021
- Dave Bautista told he was too big to play zombie on The Walking Dead - NME - February 17th, 2021
- Dave Bautista Offered To Play A Zombie For Free On The Walking Dead - Screen Rant - February 17th, 2021
- Is plurilateralism making the WTO an institutional zombie? - East Asia Forum - February 17th, 2021
- REVIEW: Zom 100: Bucket List of the Dead, Vol. 1 is a Comedic Zombie Apocalypse - CBR - Comic Book Resources - February 17th, 2021
- Don't Eat Pete is a zombie survival game that's available now for Android in Early Access - Pocket Gamer - February 17th, 2021
- Call of Duty Warzone seems to be teasing Zombies - Gamesradar - February 17th, 2021
- James Gunn Weighs In On Whether Zombies Or Vampires Are More Dangerous - Looper - February 17th, 2021
- The Walking Dead back on the march - Stuff.co.nz - February 17th, 2021
- The Walking Dead Turned Dave Bautista Down for a Zombie Role - Superherohype.com - February 16th, 2021
- Army of the Dead Image Teases Zombie Heist Movie - /FILM - February 16th, 2021
- The Real Life Diet of Rob Zombie, Who Thinks Eating Vegan Is Metal - British GQ - February 16th, 2021
- Rob Zombie says veganism is about 'fighting the establishment' - Vegan Food and Living - February 16th, 2021
- The Next Generation of Marvel Zombies Is Already in the Marvel Universe - CBR - Comic Book Resources - February 16th, 2021
- It Looks Like Zombies Are Coming To Warzone Season 2 | TheGamer - TheGamer - February 16th, 2021
- ROB ZOMBIE Explains Why He Went Vegan "It Is Anti-Establishment" - Metal Injection - February 14th, 2021
- Zombie Baseballs and MLBs Home Run Problem - The Wall Street Journal - February 14th, 2021
- Rob Zombie Thinks Eating Vegan Is Metal - GQ - February 14th, 2021
- This is what the DoD has planned for a zombie apocalypse - We Are The Mighty - February 14th, 2021
- 3 Cookbooks and guides to teach you how to survive during the eventual zombie apocalypse - Undead Walking - February 14th, 2021
- Call Of Duty Zombies: All Zombies Crews, Ranked - TheGamer - February 14th, 2021
- Tesla : Which is the best EV to own to survive a zombie apocalypse? - marketscreener.com - February 14th, 2021
- Here's How You Can Watch Every Season Of iZombie - Looper - February 14th, 2021
- What's The 1st Thing You'd Grab If Zombies Invaded Twin Falls? - kezj.com - February 14th, 2021
- Kennedy: Banks, communities need to collaborate on zombie property upkeep - The Daily Gazette - February 10th, 2021
- Zombies Attack Bend! [With Video] - The Source Weekly - February 10th, 2021
- Ten Zombie Comedies That Won't Rot Your Braaaaaaaains - tor.com - February 10th, 2021
- These Bulletproof Vehicles Are Perfect For Surviving The Zombie Apocalypse - HotCars - February 10th, 2021
- How a Left 4 Dead Remaster Could Revive the Zombie Shooter Genre - CBR - Comic Book Resources - February 10th, 2021
- Rise of Barnegat Light's Zombie Whale; It Starts With Dead Bigfoots, the Devils - The SandPaper - February 10th, 2021
- The Senate should do everything it can to avoid a zombie impeachment trial - CNN - February 9th, 2021
- 8 Video Game Zombies That Break the Traditional Mold - Bloody Disgusting - February 9th, 2021
- Zombie Reddy Four Days Box Office Collection, Teja Sajja's Film Is Ruling The Box Office. - Sakshi Post - February 9th, 2021
- Colm O'Regan: The perfect Valentine's Day gift - a zombie plan for the one you love - Irish Examiner - February 9th, 2021
- Zombie Reddy Third Day Box Office Collection, Teja Sajja's Film Passes The Weekend On A Phenomenal Note - Sakshi Post - February 9th, 2021
- How to Play the Witch Role Mod in Among Us | Screen Rant - Screen Rant - February 9th, 2021
- Reanimation and Zombies: Discussion with author Frank Swain - WLNS - February 9th, 2021
- Stubbs the Zombie Is Returning In a Unique Re-release From Aspyr Media - Happy Gamer - February 9th, 2021
- Author discussion to explore reanimation, zombies - The Hillsdale Daily News - February 9th, 2021
- Not Ready to Die: These 5 'zombie' cars were sold alongside their replacements - Driving - February 5th, 2021
- Zombie Reddy movie review: When the zombies attack Seema - The Hindu - February 5th, 2021
- Stubbs the Zombie comes back from the dead in March, achievements revealed - TrueAchievements - February 5th, 2021
- Prasanth Varma: Zombie Reddy doesnt make a joke out of zombies - The Indian Express - February 5th, 2021
- Stubbs the Zombie Re-Release Launching in March | Game Rant - GameRant - February 5th, 2021
- Shang-Chi Finally Found the Cure for the Newest Kind of Marvel Zombie - CBR - Comic Book Resources - February 5th, 2021
- Free-Roam VR Unleashed - The Source Weekly - February 5th, 2021
- Releasing Today: Zombie Attack On Box Office.. - Greatandhra.com - February 5th, 2021
- ROB ZOMBIE's New Album Was Completed A Couple Years Ago - Metal Injection - February 5th, 2021
- Zombie nation: Third of adults walking around in concussion-like daze due to stress, lack of sleep - Study Finds - February 5th, 2021
- Stubbs the Zombie Achievements Listing Hints a Re-release in March - The Nerd Stash - February 5th, 2021
- Stubbs the Zombie in Rebel Without a Pulse Re-Release Hinted - NoobFeed - February 5th, 2021
- Splunking the Zombie Apocalypse - Security Boulevard - February 4th, 2021
- The Last of Us Meets The Division In Zombie MMO The Day Before - Screen Rant - February 4th, 2021
- Zombie-Bite Politics - The Dispatch - The Dispatch - February 4th, 2021
- World War Z & 9 More Of The Highest-Grossing Zombie Movies Of All Time - Screen Rant - February 4th, 2021
- AOC's terrifying account of the Capitol siege: 'It almost felt like a zombie movie' - CNET - February 4th, 2021
- Korean Zombie says he hit rock bottom and gained over 40 lbs after loss to Brian Ortega - Bloody Elbow - February 4th, 2021
- Varun Tej heaps praise on Teja Sajja at Zombie Reddy pre-release event - Times of India - February 4th, 2021
- Cold War Zombies: How to Upgrade The D.I.E Shockwave - Screen Rant - February 4th, 2021
- ROB ZOMBIE Releases New Single And Video 'The Eternal Struggles Of The Howling Man' | Scoop News - Scoop.co.nz - February 4th, 2021
- THE WALKING DEAD Season 10 "Ties that Bind" Trailer (2021) Zombie Horror - JoBlo.com - February 4th, 2021
- Feeding monopolies and zombies: Made in the USA: Socialism for the Rich. Capitalism for the Rest - The Times of India Blog - January 30th, 2021
- Hear Rob Zombie's Raucous New Song "The Eternal Struggles of the Howling Man" - Revolver Magazine - January 30th, 2021
- The Korean Zombie says he hit rock bottom and gained 20kgs following loss to Brian Ortega - BJPENN.COM - January 30th, 2021
- ROB ZOMBIE To Release A New Song This Friday - Metal Injection - January 30th, 2021
- The Day Before Is Basically The Division with Zombie-like Infected - Wccftech - January 30th, 2021
- USM Alumna's Novel Included on Best Fiction for Young Adults List - Southern Miss Now - January 30th, 2021
- Zombies and Neon Fury Star in Howie Lees Insane New Music Video - RADII - January 30th, 2021
- This $23 emergency radio is all you need to survive the zombie (or robot) apocalypse - CNET - January 25th, 2021
- The real zombie threat as the Arctic thaws and other climate briefs - Haaretz - January 25th, 2021
- When the zombies come, I will be ready - Rochelle News Leader - January 25th, 2021
- The information warriors fighting 'robot zombie army' of coronavirus sceptics - The Guardian - January 25th, 2021
- Tips To Survive An Infinite Number Of Rounds In Black Ops: Cold Wars Zombies Mode - TheGamer - January 25th, 2021
- Yungblud and Machine Gun Kelly tease zombie film-inspired 'Acting Like That' video - NME.com - January 25th, 2021
Reviewed and Recommended by Erik Baquero