Those who Operate Dissolved Corporations can be Held Personally Liable for the Corporate Debt Incurred
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Under Florida law, the dissolution of a corporation can occur for many reasons. Section 607.1401, Florida Statutes, covers dissolution occurring by the actions of incorporators; section 607.1402, Florida Statutes, concerns dissolution by the board of directors and/or shareholders; and section 607.1420, Florida Statutes, governs administrative dissolution, which is an action commenced by the department of the Florida Secretary of State for various reasons. Whatever the cause for the dissolution, Florida law is clear on the process for winding up the corporation, including the allowable actions by agents, officers and directors subsequent to the dissolution. Specifically, those individuals may not carry on any business except that appropriate to wind up and liquidate the business and its affairs. Fla. Stat. § 607.1405(1). If a person enters into contracts or conducts other business in the name of a dissolved corporation then that person can be held personally liable for those contracts and business obligations. This blog post will discuss the extent of that personal liability and the remedies available to those damaged by corporate action subsequent to dissolution.
When a corporation is administratively dissolved by the state, “a director, officer, or agent . . . purporting to act on behalf of the corporation is personally liable for the debts, obligations, and liabilities . . . arising from such action and incurred subsequent to the corporation’s administrative dissolution.” Fla. Stat. § 607.1421(4). Whether a corporation has been dissolved or not can be easily determined by searching the corporation name on the Florida Department of State’s website. That website will provide the status of the corporation and, if dissolved, the date of administrative dissolution. For any corporate activity commenced after that date, the person initiating that corporate activity can be held personally liable for that action if that person had actual knowledge of the dissolution status. Id. The requirement for actual knowledge of dissolution is to protect an employee, such as a salesperson, from being liable when that salesperson would have no way of knowing that its employer was recently dissolved. However, it is must more difficult for an officer and/or director to claim he or she had no such knowledge.
Florida courts have held that a mere statement by an officer and/or director that he or she lacked actual knowledge of the dissolution is insufficient to relieve that person of personal liability. Barrie v. Buchsbaum, 547 So.2d 1009 (Fla. 3d DCA 1989). In fact, a person can be liable for actions taken on behalf of a dissolved corporation if the individual “knew or, because of their position, should have known of the dissolution.” Id. at 1010. A president, registered agent, and/or director would all be in a position where he or she should have known of the corporation’s dissolution at the time dissolution occurred. See Id.
Under Florida law, a corporation can be reinstated if it remedies the issues and circumstances which led to its dissolution. See Fla. Stat. § 607.1404; Fla. Stat. § 607.1422. Yet reinstatement does not automatically relieve its officers and directors from any personal liability incurred by operating the business while dissolved. See Mobil Oil Corp. v. Thoss, 385 So.2d 726 (Fla. 5th DCA 1980). Florida’s Fifth District has held that a person who knows or should have known of the corporation’s dissolution is personally liable for any ongoing business activity commenced during the interval between dissolution and reinstatement if the corporation is eventually reinstated. Id.
To impute liability on a certain officer or director for the corporate debt incurred during dissolution that actual officer or director would have had to be the one who entered into the contract or obligation. Futch v. Southern Stores, Inc., 380 So.2d 444 (Fla. 1st DCA 1979). Stated another way, if the president is the one who signed the contract, but the vice president did not, then personal liability can only be imputed to the president, i.e. the one who executed the corporate contract. Id. If it was unclear who entered into the corporate contract during dissolution, liability cannot be imputed to any individual who was an “inactive officer” at the time. Id. Thus, an inactive officer or inactive director cannot be held liable for the corporate contracts made by another officer while the corporation was dissolved. Id.
A contract or obligation entered into under the name of a dissolved corporation may happen more often than one may think. For example, an officer may have plans to eventually reinstate the company once he or she has time to cure its defect; however, he or she may not want to lose the company’s customer base by temporarily ceasing operations. Consequently, the officer continues operating the business for months while it is dissolved. As another example, an officer may renew a commercial lease agreement based on his or her intentions to reinstate the company and not wanting to lose a good piece of commercial real estate in the interim. Florida’s Third District has specifically held that an officer is personally liable for rent incurred under a lease during the period in which the corporation was dissolved. Terranova Corp. v. Fried, 548 So.2d 270 (Fla. 3d DCA 1989).
The damaged party under these circumstances can bring its claim against the individual officer and/or director by naming that person as a defendant in any ensuing legal action. Regardless of whether the appropriate remedy is money damages, or an equitable remedy such as specific performance, the remedy can be sought against any individual who is personally liable for the corporate action under these circumstances. Creditors would be wise to do their research to determine whether an individual can be held personally liable for the corporate debt owed as this would greatly improve the creditors’ chances for collecting that debt.