In a similar manner to other states, Florida also allows companies to be dissolved involuntarily. This involuntary dissolution is done through a court order and is thus called judicial dissolution. The grounds for this judicial dissolution have been provided under section 607.1430 of the Florida Statutes, which provides that the courts may involuntarily dissolve a company. The right for this dissolution is given to the circuit courts, which have the authority to undertake this action and provide whatever judicial remedy it thinks is suitable.
The Statute has laid down several circumstances in which the court may decide on its own to dissolve a company or where a shareholder can initiate a judicial dissolution. For a court to intervene voluntarily, a company must either have obtained its articles of in company fraudulently or have abused its legal power. Other grounds for the judicial dissolution are not based on illegal activities but have been established to apply based on the business/income of the company. When a company’s assets have been mismanaged or where shareholders may be in a voting or management deadlock is when this provision applies.
Having discussed the basic aspects of judicial dissolution, this article will now focus on what happens during the judicial dissolution process and what the company must do during this time.
A circuit court can dissolve a company in three ways. Firstly, to do so, the Department of Legal Affairs must be involved; secondly, the management or members of the company must be involved; and lastly, the company itself has to be involved in a voluntary dissolution procedure. (Florida Statutes, § 605.0702.) A court may dissolve a company if it is shown that the company got its articles of in company via dishonesty or fraud or that the company has misused the power bestowed on it by law. (Florida Statutes, § 605.0702(1)(a)(1-2).) There are five methods in which a manager or member might establish a judicial dissolution in a proceeding by the management or member:
- If it is impossible for the company to follow the norms of the articles or its operating agreement.
- If it is impossible for the company to stop indulging in unlawful activities.
- If there are any controlling managers and they have acted illegally.
- If the company’s properties are being stolen, causing harm to any of its associates.
- If there is a “deadlock” situation in the management, an injury is caused to everyone associated with the company.
(Florida Statutes, § 605.0702(1)(b)(1-5).)
A company can also continue its voluntary dissolution under judicial supervision. (Florida Statutes, § 605.0702(1)(c).) The court may dissolve the limited liability company and designate the date of dissolution if it finds one or more reasons for judicial dissolution. (Florida Statutes, § 605.0705(1).) The court will then order the company’s operations and affairs to be wound up and liquidated. (Florida Statutes, § 605.0705(2).)
Deadlock and Judicial Dissolution
Many new companies get off the ground with a fantastic concept and a trustworthy collaboration and start raking in investments. However, in many cases, a deadlock develops between company owners.
When management or members cannot break the deadlock, Florida’s law permits judicial dissolution to prevent irreparable harm from occurring to a company. When an operating agreement specifies what happens in the case of a stalemate, a deadlock sale provision becomes significant. If the operating agreement has a deadlock sale provision, a deadlock in the administration of company’s operations and affairs could be swiftly resolved by following the norms laid under the provision. (Florida Statutes, § 605.0702(2).) This deadlock provision usually contains viable solutions that can include forcible partition or sale of a company or its assets, buy and sell mechanisms, a proposal for change in governance, or a simple voting mechanism.
Every so often, investors and partners change positions and some companies, unfortunately, go out of business due to lack of funding. In such a situation, the directors of a company find themselves in a deadlock about how the company’s issues should be handled. As a result, the directors are left with only two choices: 1) sell the company, or 2) force a dissolution of the company via the courts.
Courts are empowered by section 607.1430. of the Florida Statutes to dissolve companies where directors are deadlocked in their administration of corporate affairs, shareholders are powerless to break an impasse, and irreparable harm is being threatened or sustained. A court order for judicial dissolution is issued if the judge determines that the company’s assets must be liquidated and its affairs wound down. It is thus possible to dissolve a company judicially, but the process may be extended and expensive and eat away at the company’s value.
With that in mind, in most circumstances, shareholders would benefit from a buyout or an open market sale of the company. A business lawyer can help you with a detailed analysis and legal implications for your company if you decide to dissolve it. Consult our experienced business attorney if you have concerns about a corporate deadlock or judicial dissolution.
Winding Up Company Affairs
The “wind up” phase of a company begins after dissolution is initiated. Dissolution and the filing of a termination statement are referred to as “winding up” in this context. This process allows a dissolving company to wind up and disperse its assets in an orderly way. For a reasonable period throughout the winding-up process, the company can continue its operations, pursue, and defend actions, sell property, and resolve disputes via mediation or arbitration. When the company is dissolved by court order, the court will oversee the “wind-up” procedure to safeguard creditors. The appointment of a liquidator by the court is one of the mechanisms for judicial oversight. If the company wishes to wind up on its own terms, the company should have a sound strategy that is legally apt. There should be provisions in the plan for notifying known creditors, selling and transferring the company’s assets, and acquiring and dividing the company’s assets. With good cause and under certain conditions, creditors may also file a petition to have a trustee or receiver appointed for winding up.
Considering these complex steps involved, you should speak with a knowledgeable corporate counsel who is well-versed with the rules regulating non-judicial and judicial company breakups if you ever find yourself in a situation of operational or management deadlock.
If you and your fellow business owners find yourself at an impasse, it is important to bring in corporate counsel to help mediate and navigate the issues at hand. In many cases, judicial dissolution can be avoided. Contact us for a consultation with our seasoned business attorney! We will get back to you right away.