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

period of time, to the issuance of an order of dissolution, in which case the court dissolves thenonprofit, thus ending its corporate existence, and retains jurisdiction to oversee the windingup process.In many ways, judicial dissolution is a cheaper, less complicated state law alternative to thefederal bankruptcy process. The state law process is also less formal and less well known.Indeed, there is very little Illinois case law on judicial dissolution, leaving many critical issuesunresolved, such as the enforceability of a state court dissolution plan against an out-of-statecreditor. In any event, even though it is cheaper than bankruptcy, the judicial dissolutionprocess will invariably be expensive and time-consuming for all parties. As a result, manynonprofits avoid judicial dissolution simply because their creditors and/or members lackmotivation to pursue this option.Administrative DissolutionThe final form of dissolution available under Illinois law is administrative dissolution. Thepower to administratively dissolve a nonprofit lies with the Illinois Secretary of State and can beexercised when a nonprofit fails to file its annual report, fails to pay a fee, and/or fails toappoint or maintain a registered agent in the state. If, after being notified of the Secretary ofState’s intent to seek administrative dissolution, the nonprofit fails to correct the problem, theSecretary of State will issue a certificate of dissolution which terminates the nonprofit’scorporate existence.Administrative dissolution presents an interesting option for the nonmember nonprofit thatcannot pay its debts and, for whatever reason, is not subjected to judicial dissolution. Perhapsthe nonprofit’s creditors are not interested in pursuing an expensive, drawn-out court process,nor is the Attorney General’s office. Perhaps the nonprofit’s creditors and the nonprofit have allreached workout agreements, whereby the nonprofit has agreed to pay each creditor a portionof its debt. As explained above, the NFPCA does not allow the directors to voluntarily dissolvethe nonprofit in this situation. The directors could, however, simply stop filing paperwork withthe Secretary of State, thus allowing the nonprofit to be administratively dissolved. Once thecertificate of dissolution is issued, the nonprofit can then bar claims against the corporation andits officers, directors, employees, etc. by following the process set forth in the NFPCA.Assuming the nonprofit’s creditors are all satisfied with their workout agreements and thus donot file a claim during the window set forth in the NFPCA, once that window closes, thenonprofit will have achieved the same level closure associated with voluntary or judicialdissolution. Of course, allowing the nonprofit to be administratively dissolved is not a perfectoption, and for it to be successful, the nonprofit’s creditors have to be patient and thenonprofit’s leadership has to be willing to risk a potential mismanagement claim during themonths in which they are failing to comply with the state’s filing requirements. In addition, thedissolution timeline is not entirely in the nonprofit’s control, and the nonprofit cannot evenbegin the process of barring claims until the certificate of dissolution is issued. Finally, becausepurposefully allowing an administrative dissolution is tantamount to abandonment, thenonprofit may face criticism and inquiry from members of the community, governmentofficials, or other interested parties.67