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Can a business that is in the process of dissolving in California file in small claims court case against a contractor who owes them money?

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    Can you elaborate on the "winding up" period? How much time do you have to typically wind up? – Soula Jul 19 '18 at 20:51
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Yes, so long as it is in good standing in the sense of having kept current on its Franchise Tax Board obligations and its Victims of Corporate Fraud Compensation Fund obligations.

Once a corporation files for dissolution there is still a "winding up" period during which the rights of the corporation can still be enforced.

The relevant statute is California Corporations Code § 2010 which provides that:

(a) A corporation which is dissolved nevertheless continues to exist for the purpose of winding up its affairs, prosecuting and defending actions by or against it and enabling it to collect and discharge obligations, dispose of and convey its property and collect and divide its assets, but not for the purpose of continuing business except so far as necessary for the winding up thereof.

(b) No action or proceeding to which a corporation is a party abates by the dissolution of the corporation or by reason of proceedings for winding up and dissolution thereof.

(c) Any assets inadvertently or otherwise omitted from the winding up continue in the dissolved corporation for the benefit of the persons entitled thereto upon dissolution of the corporation and on realization shall be distributed accordingly.

Also relevant is California Corporations Code § 207, which is one of the sources of the right to sue in general of a corporation without regard to its status as dissolved or not, provides in the pertinent part:

Subject to any limitations contained in the articles and to compliance with other provisions of this division and any other applicable laws, a corporation shall have all of the powers of a natural person in carrying out its business activities[.]

The winding up period continues until all assets have been marshaled by the dissolved corporation and then distributed to the persons entitled to those assets. A right to bring a lawsuit is one form of asset.

  • If the business has a pending lawsuit against them which hasn't been heard in court yet, will a dissolution of the business prior to the court date dismiss the lawsuit? – Soula Jul 19 '18 at 21:24
  • @Soula No, per California Corporations Code § 2010(b) quoted above and in boldface type. A federal bankruptcy filing, in contrast, would stay such a lawsuit until a court releases the stay or an adversary action is filed in bankruptcy court. Also, good standing is not generally necessary to defend a lawsuit as opposed to bringing one. – ohwilleke Jul 19 '18 at 21:30
  • So it sounds like bankruptcy would be the only way to stay a lawsuit, not dissolution, correct? Should we do both dissolution and bankruptcy since the company has no assets? – Soula Jul 19 '18 at 21:41
  • @Soula Corporations don't get a discharge of their debts in bankruptcy unlike individuals. Bankruptcy provides a stay and an orderly distribution according to priority but no more if there is no plan to keep the business as a going concern. Unless net assets exceed net liabilities after adjusting for litigation and winding up costs (and the corporation has not made "fraudulent transfers" to its shareholders), it makes sense to simply walk away from the entity not fighting lawsuits and not starting any, rather than incurring lots of litigation costs with no real stakes. – ohwilleke Jul 19 '18 at 21:44
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    @Soula Law.SE can answer general questions, it can't make decisions for you based upon your individual facts. In a Chapter 7 bankruptcy (liquidation not a Chapter 11 reorganization) only the bankruptcy trustee who represents general unsecured creditors can file lawsuits on behalf of the corporation and only if he sees fit to do so, and all shareholder interests are forfeit, unless the bankruptcy estate pays in full, or fully resolves, all creditor's claims. – ohwilleke Jul 19 '18 at 21:58

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