DISSOLUTION OF A CORPORATION
Sec. 113. Expiration of charter. Corporate existence may be
terminated by the expiration of its charter, through dissolution by
the attorney general, by consolidation, or by action of the stock-
Where the charter provides that the corporation shall exist for a
definite period, it automatically terminates at the expiration of the
period. However, upon application, a rule for the continued exist-
ence of the corporation may be made.
Sec. 114. Dissolution by attorney general. The attorney gen-
eral of the state is the only person authorized to forfeit a charter.
The state, having brought the corporation into existence, has a right
to forfeit the charter. Neither a stockholder, a corporate creditor,
nor any other governmental agency can bring a suit to forfeit a
corporation charter. If a corporation misuses its power, or enters
into illegal acts, such as combinations in restraint of trade, or ceases
to perform its corporate functions for a long period of time, the
attorney general may institute a suit for the purpose of forfeiting
the corporate charter. A suit by the state to forfeit a corporate
charter is called a quo warranto proceeding.
Sec. 115. Consolidation and merger. Consolidation is the
uniting of two or more corporations, by which a new corporation
is created and the old entities are dissolved. The new corporation
takes title to all the property, rights, powers, and privileges of the
old corporations, subject to the liabilities and obligations of the old
In a merger, however, one of the corporations continues its exist-
ence, but absorbs the other corporation, which is merged into it.
Whether the creditors of the absorbed corporation become the cred-
itors of the absorbing corporation depends upon the solvency of the
absorbed corporation and the inability of its creditors to find at-
tachable assets. The continuing corporation may expressly or im-
pliedly assume and agree to pay the debts and liabilities of the
absorbed corporation. If so, such creditors become third party
creditor beneficiaries. By statutes in many states the surviving
corporation is deemed to have assumed all the liabilities and obli-
gations of the absorbed corporation. The statutes of the various
1 Pullman's Palace Car Co. v. Missouri Pac. Ry. Co., 1885, 115 U.S. 587, 29 L. ed.
499; p. 722.
DISSOLUTION OF A CORPORATION 303
states provide the methods for corporate consolidation and merger.
Sec. 116. Dissolution by the stockholders. A corporation can
be dissolved by the consent of all the stockholders, and by less than
all of the stockholders if it is insolvent. If the corporation is in-
solvent, it may be dissolved upon application to the state which
created it. Under these circumstances, a court usually appoints a
receiver to marshal the assets and to make distribution to the
Upon dissolution, all the corporate property, both personal and
real, is first used to pay corporate debts. After the debts are paid,
the remainder is to be distributed among the stockholders in pro-
portion to the capital stock they own. The liability of the stock-
holders, upon dissolution, ceases as to any further business. Where
a receiver has been appointed and it is necessary to carry out con-
tracts not yet completed, the corporation still remains liable for
the performance of its executory contracts.
Rights of Creditors
Sec. 117. Right against corporate assets. The corporation
stands in the same position as a natural person, with respect to
creditors. A suit may be brought against it and, upon judgment
being obtained, an execution may be levied against its property,
which may then be sold. Likewise, corporate assets may be at-
tached, and, if the corporation has no property subject to execu-
tion, its assets may be traced by a bill in a court of equity.
The creditors have no right, because they are creditors, to inter-
fere with the management of the business. 2 A creditor who has an
unsatisfied judgment against a corporation, because there is no
corporate property upon which a levy can be made, may bring a
bill in equity to set aside conveyances and transfers of corporate
property which have been fraudulently transferred for the purpose
of delaying and hindering creditors. 3 Creditors may also, under
the above circumstances, ask for a receiver to take over the assets
of the corporation and to apply them to the payment of debts.
Sec. 118. Right against stockholders. Stockholders are not
liable for the debts of the corporation. This distinction is the es-
sential feature in which a corporation differs from a partnership.
Each member of a partnership is liable for the debts of the firm.
The members of a corporation, on the other hand, are not liable for
the debts of the firm.
If the members of a corporation have not paid their stock in full,
2 Hollins et al. v. Bricrfield Coal & Iron Co., 1893, 150 U.S. 371, 37 L. ed. 1113;
3 Graham v. La Crosse & M. R. R. Co., 1880, 102 U.S. 148, 26 L. ed. 106; p. 723.
304 BUSINESS ORGANIZATIONS CORPORATIONS
however, the creditors, after exhausting the assets of the firm, may
look to the stockholders for their unpaid balance. This is the limit
of the liability of the members of a corporation.
But the statutes of many states have increased the liabilities of
stockholders to corporate creditors. That is, the statutes provide
that the stockholders shall be liable for a sum in addition to the par
value of their stock. This additional liability is known as the stat-
utory liability of stockholders. A few states, by statute, attach
additional liability to stockholders of manufacturing corporations.
Some attach liability equal to the par of the shares in banking and
trust companies. The stockholders will be liable to the creditors, if
the capital stock has been distributed among the stockholders be-
fore the creditors have been paid, and the creditors can reach the
assets of the corporation in the hands of the stockholders, on the
theory that the assets have been transferred in fraud of creditors.
Review Questions and Problems
1. The majority of the stockholders of a corporation, being interested
in a rival concern, vote to dissolve the corporation. Can it be dissolved
without the consent of the minority? Suppose the corporation had been
2. The X Company, for a number of years, has failed to perform any
of the duties authorized by its charter. Who is the proper person to dis-
3. May the creditors of an insolvent corporation recover from the
stockholders after the corporate assets have been exhausted?
4. The stockholders of a corporation sell some of the corporation prop-
erty and divide it equally among the stockholders. Later, the corpora-
tion becomes insolvent. Can the creditors force the stockholders to re-
turn the amount which they received?