Insolvency and Louisiana's Adoption of the Model Business Corporations Act

Posted on: May 26 2015 | Posted in: Committees

Louisiana has replaced its business corporate statute in its entirety by adoption of a variation of the Model Business Corporations Act. See La. R.S. 12:1-101, et seq. (“New Act”). While all business attorneys should study the new statute and consider taking a CLE regarding it, a very few highlights as they might impact insolvent companies and the attorneys who deal with them follow.

Insolvent Corporations Outside of Bankruptcy

Not all insolvent corporations file bankruptcy or are placed involuntarily into bankruptcy.  One reason in the past to utilize bankruptcy for entities was concern regarding contingent or unknown liabilities. The new law, however, creates the legal fiction that a dissolved corporation’s existence continues for purposes of liabilities unknown or omitted in the state court dissolution. La. R.S. 12: La. R.S. §12:1-1443(B)(3). Even for “[s]implified termination” under new La. R.S. 12:1-1441 (i.e. the equivalent of the old dissolution by affidavit), the new statute intends that no personal liability attaches to shareholders. La. R.S. 12:1-1441, Comment (a) (2014 Revision); La. R.S. §12:1-1443(C)(3).

UGAs and Authority to File Chapter 11

Perhaps the greatest change under the new corporate law is the concept of “Unanimous Governance Agreements” (“UGAs”). See La. R.S. 12:1-732. If properly confected, UGAs can give to one or more shareholders certain powers one would normally presume reserved for the board of directors. The term does not per se exist under the Model Act, although the concept does. Corporate attorneys might wish to consider UGAs implications as a possible alternative to “bankruptcy remote entities.”

Restrictions Upon Shareholder Distributions Loosened

The New Act loosens the restrictions upon distributions to shareholders, which restrictions were designed to protect creditors. First, stated capital is no longer a restriction upon distribution. Compare La R.S. 12:1-640 with La. R.S. 12:61 - 63 [Repealed]. Second, the analysis for the allowable timing of distributions favors shareholders vis-à-vis creditors. See La R.S. 12:1-640 (E)(1) and (3) contrasted with La. R.S. 12:63 (B) [Repealed], which implicates creditor and bankruptcy trustee concerns over the truthfulness of the dating of the corporate action authorizing such distributions. Third, repurchase (i.e. redemption) of stock with indebtedness is no longer prohibited, as was the case under La. R.S. 12:63 (A) [Repealed], and is to be treated as of equal quality with third party indebtedness, opening the door for potential abuse by corporate management. La R.S. 12:1-640 (F). This last provision has litigation implications for bankruptcy trustees and wily shareholders under 11 USC 548(a)(1) & (2), as well as the revocatory action under La. C.C. art. 2036 et seq.



About the Author:

Albert J. Derbes, IV, Chair of NOBA’s Bankruptcy Debtor/Creditor Rights Committee

Albert J. Derbes, IV practices in the areas of commercial bankruptcy, commercial litigation, entity law, as well as other areas regarding business and financial matters. He regularly speaks regarding bankruptcy and other business matters. He formed the Derbes Law Firm, LLC over twenty years ago with his father, and it has grown to nine attorneys. 


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