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  • Writer's pictureDaniel Rodriguez

Should a Troubled California NonProfit File Bankruptcy or Wind Down through a Dissolution?

What Is a California Business Dissolution? For certain entities, including non-profit entities, it may be prudent to explore additional state law remedies to address debt and debt situations. One of these potential state law remedies available in California is a dissolution under state law. In California, a dissolution of an entity can be voluntary or it can be involuntary. A voluntary dissolution in California is a step that the directors and other controlling parties of a non-profit organization can elect to take. Nonprofits can be dissolved for nearly any reason or for no reason at all.  In fact, an entity can be dissolved without any input from the courts. However, in certain scenarios, one or more interested parties may petition a California court to oversee and supervise the process of winding down and dissolving the entity. The exact process regarding how a non-profit or other entity should proceed comes down to the current facts and circumstances in the matter. In certain situations, most commonly where creditors of the organization exist, certain directors or board members may need to approve the dissolution. It is also necessary to consult with any governing documents concerning the entity when determining the correct method of winding down the entity through a voluntary dissolution.

Can a Dissolution Be Forced or Involuntary in California? Certain interested parties may bring about an involuntary dissolution case in an array of circumstances. Interested parties that can start involuntary dissolution proceedings include:

  1. 50-percent of the non-profit or entity’s board of directors

  2. One-third of all members vote to bring about dissolution proceedings

  3. Any party authorized to commence involuntary dissolution in the organization’s bylaws or governing documents

  4. The California state attorney general The impact of an involuntary dissolution proceeding is significant. While the process bears a certain resemblance to a straight bankruptcy under Chapter 7, it is a distinct legal proceeding. However, in comparison to the bankruptcy process, even an involuntary dissolution can provide for more flexibility and may present a viable option when parties are still able to negotiate and work together. Once the dissolution process begins, the entity is under an obligation to wind down operations while settling debts and obligations through a liquidation of its assets.

How Do I Know if a Bankruptcy and Dissolution Are Right for a Nonprofit? When a non-profit begins to experience financial stress due to excessive debts and obligations relative to the organization’s revenue, directors, and managers may be called upon to make difficult decisions regarding the future of the business. While both bankruptcy and dissolution under state law can produce the end result of a liquidated entity, laws regarding the treatment of debt and creditor claims varies significantly. Consider that the bankruptcy process comes with certain protections and powers that are not available in a dissolution. That is, the automatic stay can stop creditor collection attempts and the entity has certain powers to avoid certain contracts or transactions to facilitate settling its debts. These powers and protections are not available in a dissolution proceeding. In exchange for the lack of these powers, there is greater flexibility in a dissolution. Furthermore, parties can avoid the involvement of a court in the finances and day-to-day affairs of the entity.

Work with Non-Profit Business Dissolution and Sacramento Bankruptcy Attorneys in California If your non-profit business or other entity has run into financial difficulties, the most prudent path forward may be a liquidation of the entity’s assets. However, the approach the responsible parties take regarding the liquidation can have profound impacts on the overall disposition of the debts and obligations. The Sacramento bankruptcy lawyers of The Bankruptcy Group can help you and your non-profit business determine which path is likely to provide a prudent means to move forward. To schedule a confidential consultation, call or contact us online today.

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