Legal Question in Business Law in California

Re: suspended Corp

There are at least a couple of possibilities.

One, it can file for bankruptcy, and let a trustee handle the distribution of assets and payment of liabilities. The suspension of corporate powers does not affect the corporation's ability to file for bankruptcy in federal bankruptcy court (see In re Feature Homes, Inc. (1990) 116 Bankruptcy Reporter 731.

Two, anyone with an interest in the corporation's affairs can pay the taxes and apply for revivor. This would allow the corporation to wind up its affairs and dissolve normally.

The third method, which I don't recommend but which appears to happen many times, is that the persons in control of the corporation simply liquidate it, suspended or not. This process does not seem to be authorized by law, and I could not find any case or discussion of it; the corporation owns the assets, of course; and it would require a corporate action to dispose of them, which the corporation cannot take. On the other hand, there is a possible argument that the directors are de facto trustees of the suspended corporation's assets, and that the creditors and shareholders are the beneficiaries of the de facto trust. As I say, this seems to be a weak defense of the directors liquidating the corporation outside the procedures (1) or (2), above.

Whatever happens, the creditors get paid off before the first dime goes to an insider (director, officer or shareholder), and the FTB is high on the pay-off priority list.