At first glance, the process of dissolving a business may seem focused on the division of assets and wrapping up loose ends. But fiduciary duties continue to apply, particularly those of directors, officers, or partners, to prioritize the interests of the business and its stakeholders. These responsibilities fall under the category of loyalty and care and stress the importance of avoiding self-dealing or personal gain in the business operations. These duties are more than niceties. Failure to adhere to them can lead to significant negative legal consequences.

There are several grounds on which stakeholders can argue that a breach of loyalty and care has taken place during a business dissolution. These include:

• Asset misappropriation – Improper handling of company assets, including transferring them to themselves or third parties at below-market value or failing to account for all assets during liquidation.
• Opportunity usurpation – Exploiting the dissolution for personal gain by taking over business opportunities that would have gone to the dissolving entity. Examples would include redirecting contracts, client relationships, or intellectual property that rightfully belongs to the dissolving company to another.
• Preferential payments – Paying favored creditors or insiders such as family members and friends out of sequence or in violation of the law, disadvantaging other legitimate creditors.
• Negligent management – Failing to protect remaining assets, failing to pay debts, and allowing company assets to depreciate in value are all examples of negligence that can lead to legal claims.

The best way to avoid these pitfalls is to focus on transparency and disclosure during the process of winding up a business. Fiduciaries have a responsibility to disclose all relevant information regarding the company’s assets, obligations, and liabilities and to make sure all stakeholders have a clear picture of the company’s economic health. The more people know, the lower the risk of being accused of mismanagement or favoritism.

The goal – even during dissolution – is fair and equitable treatment of all stakeholders and creditors.  Debts and obligations come first before partners or shareholders receive any distributions of remaining assets, which need to be properly appraised and valuated in order to make sure there are no allegations of self-dealing or undervaluation for personal gain.

The best way to ensure that the dissolution of a business is done in a way that respects all of the principals’ fiduciary obligations is to go through the process with the help of experienced professionals. Call us today to learn how we can assist.