Guide-for-Nonprofit-Organizations-Bankruptcy-Issues-FINAL-with-ads

dissolution. The authors do not necessarily recommend this course of action, but offer it as apotential loophole that can be exploited by a creative board of directors.Finally, if the nonprofit’s board or officers persist in an attempt to voluntarily dissolve thecorporation without first ensuring that all debts are paid, the directors and officers couldpotentially be exposing themselves to personal liability for the nonprofit’s debts.The Illinois Not for Profit Corporation Act (NFPCA) provides, in the context of the distributionof the assets of a corporation in the process of dissolution, that the first priority is that ―[a]llliabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequateprovision shall be made therefor.‖ 805 ILCS 105/112.16(a). Does this mean that a nonprofit canvoluntarily dissolve if it can successfully work out all of its debts with all of its creditors? Whilethe nonprofit’s debts would not be immediately paid upon execution of the workout agreement,those debts would be adequately provided for, and it is likely that the nonprofit’s creditorswould be willing to say they are satisfied with this outcome. So, does ―no debts remainunpaid‖ really mean ―no debts un-provided for?‖ Or does the nonprofit really have to waituntil the workout payment arrangements run their course before voluntarily dissolving? Whilethere is no Illinois case law on this subject, if the NFPCA requires only that debts be providedfor before voluntarily dissolving, a nonprofit that is able to reach workout agreements with allof its creditors should be able to voluntarily dissolve without needing to change the corporatestructure to include members. The problem with venturing this guess, of course, is that thenonprofit’s directors could potentially be held personally liable if it is later determined that theboard was not authorized to dissolve the corporation with some debts remaining unpaid. And,because the law is unclear, the directors could have the specter of personal liability hangingover their heads for quite a while. It is also worth noting that if the nonprofit is able to work outsome, but not all, of its debts, it would not be permitted to voluntarily dissolve, both becausethe holdout creditor could argue that the nonprofit gave preference to other creditors and alsobecause the nonprofit would not be able to say all of its debts are either paid or provided for.Because of this conundrum, the struggling nonprofit may need to consider judicial dissolutionor administrative dissolution.Judicial DissolutionAnother form of dissolution is judicial dissolution. Under Illinois law, there are a number ofagencies and entities who may seek judicial dissolution of a nonprofit, including the IllinoisAttorney General, a member of the nonprofit, and, under certain circumstances, the nonprofititself. In addition, a creditor of the nonprofit may seek judicial dissolution of the nonprofit if―the creditor’s claim has been reduced to judgment, the judgment has been returnedunsatisfied, and the corporation is insolvent‖; or ―the corporation has admitted in writing thatthe creditor’s claim is due and owing, and the corporation is insolvent.‖ (Because of thisstatutory language, a nonprofit seeking to avoid a judicial dissolution action may wish to avoidadmitting in writing that a creditor’s claim is ―due and owing‖ when attempting to work out itsdebts.)Once a judicial dissolution action is initiated in an Illinois circuit court, the court has severaloptions for dealing with the nonprofit, ranging from the appointment of a provisional directoror custodian, in which case the court retains jurisdiction over the nonprofit’s operations for a66