Can an Officer Pay Himself a Salary as Part of the Winding Down Process?

Full question:

Problem Data: I worked for a company in the state of Indiana from 1992 to 12-31-2004. The company went out of business on 12-31-2004. The company did not file bankruptcy. It just closed down. The company has been in litigation from 1-1-2005 to 6-10-2011.The company was not operational from 1-1-2005 to 6-10-11. I am the only remaining employee, officer (CEO) and voting director of the company. I worked the ligation from 1-1-2005 until it was settled on 6-10-11. The company presently owes only 3 secured Note Holders, including myself. The Note Holders have perfected a UCC-1 lien against the company for the amounts of the notes. I want to be paid a salary (wages or fee) for the work I did on the litigation for the last 7 years. I have about 2,500 hours in the litigation and want to pay myself $10 an hour for this work. I had and still have an employment contract with the company to pay me $20,000 a month.Question: Can I paid myself a reasonable salary ($25,000) for the work I did on the litigation before paying the Note Holders or would the perfected lien position of the Note Holders dictate that the Note Holders have the right to be paid first - before any salary could be paid to me? If the salary could be paid first - do I have the authority to pay myself this salary with the positions I hold with the company? Please answer my question as directly as possible - thanks

• Category: Corporations
• Subcategory: Corporate Dissolution
• Date: 04/07/2025
• State: Indiana

Answer:

The answer will depend on all the facts and terms of the governing documents. It is possible for a corporation to pay a reasonable expense of winding down ahead of other creditors.

The following is an example of a corporate bylaw dealing with order of payment in dissolution:

12.5 Distribution on Dissolution and Liquidation. In the event of
the dissolution of the Company for any reason, the business of the Company shall
be continued to the extent necessary to allow an orderly winding up of its
affairs, including the liquidation and termination of the Company pursuant to
the provisions of this Section 12.5, as promptly as practicable thereafter, and
each of the following shall be accomplished:

(a) holders of a Supermajority of the Common Shares shall
elect or appoint a liquidator;

(b) the liquidator shall cause to be prepared a statement
setting forth the Property and liabilities of the Company as of the date of
dissolution, a copy of which statement shall be furnished to the Members;

(c) the Property of the Company shall be liquidated by the
liquidator as promptly as possible, but in an orderly and businesslike manner.
The liquidator may, in the exercise of its business judgment, determine not to
sell all or any portion of the Property, in which event such Property shall be
distributed in kind based upon fair market value as of the date of such
distribution;

(d) any Profits or Losses realized by the Company upon the
sale of its Property shall be recognized and allocated to the Members in the
manner set forth in Article V; and

(e) the proceeds of sale and all other Property of the Company
shall be applied and distributed as follows and in the following order of
priority:

(i) to the expenses of liquidation;

(ii) to the payment of the debts and liabilities of the
Company (including loans from Members);

(iii) to the setting up of any reserves which the
liquidator shall determine to be reasonably necessary, for such period as
the liquidator shall deem advisable, for contingent, unliquidated or
unforeseen liabilities or obligations of the Company or the Members
arising out of or in connection with the Company. Such reserves shall be
held by the liquidator or paid over to a bank or title company selected by
it, to be held by such bank or title company as escrow holder or
liquidator for the purposes of disbursing such reserves to satisfy the
liabilities and obligations described above;

(iv) to the holder of the Series A Preferred Shares to
the extent of its Capital Account balance in respect of the Series A
Preferred Shares;

(v) to the holders of the Series B Preferred Shares to
the extent of their pro rata share of the Capital Account balance in
respect of the Series B Preferred Shares; and

(vi) the balance (including amounts released from any
unnecessary reserves set up pursuant to Section 12.5(e)(iii)), if any,
after giving effect to all contributions, distributions and allocations
for all periods, to the holders of Common Shares pro rata in proportion to
their positive Capital Account balances.

Each Member understands and agrees that by accepting the provisions
of this Section 12.5 setting forth the priority of the distribution of assets of
the Company to be made upon a liquidation, such Member expressly waives any
right which it, as a creditor of the Company, might otherwise have to receive
distributions of assets pari passu with the other creditors of the Company in
connection with a distribution of assets of the Company in satisfaction of any
liability of the Company, and hereby subordinates to said creditors any such
right.

Before the corporate assets can be distributed to shareholders, the company has to pay off all its creditors and outstanding debts. If cashflow is limited, you may have to liquidate assets to make sure everyone gets paid.

Please see the following IN statutes:

IC 23-1-45-6 (a) A dissolved corporation may dispose of the known. . .
(a) A dissolved corporation may dispose of the known claims against it by following the procedure described in this section.
(b) The dissolved corporation shall notify its known claimants in writing of the dissolution at any time after its effective date. The written notice must:
(1) specify the amount that the dissolved corporation believes will satisfy the claim;
(2) inform the creditor that it has the right to dispute the amount of the claim and describe the procedure for disputing the amount of the claim;
(3) provide a mailing address where a dispute of the amount of the claim may be sent;
(4) state the deadline, which may not be fewer than sixty (60) days after the effective date of the written notice, by which the dissolved corporation must receive the dispute of the amount of the claim; and
(5) state that the claim will be fixed at the amount specified by the dissolved corporation if a dispute of the amount of the claim is not received by the deadline.
(c) If the amount of the claim is disputed, the claimant must notify the dissolved corporation of the dispute by the deadline. If the dissolved corporation rejects the disputed amount, the claimant must commence a proceeding to enforce the claim within ninety (90) days after the effective date of the dissolved corporation's rejection notice.
(d) The amount of the claim is fixed if:
(1) the claimant does not notify the dissolved corporation by the deadline; or
(2) the claimant who has notified the dissolved corporation of a dispute and has received a rejection notice does not commence a proceeding within ninety (90) days from the effective date of the rejection notice.
(e) Regardless of a dispute in the amount of the claim, the dissolved corporation must tender to the claimant the amount of the claim as set forth by the dissolved corporation in the notice of claim within thirty (30) days after the earliest of the following dates:
(1) The date that the claim becomes fixed.
(2) The date that the claimant commences the proceeding to enforce the claim.
(f) For purposes of this section, "claim" does not include a contingent liability or a claim based on an event occurring after the effective date of dissolution.

IC 23-1-45-5 (a) A dissolved corporation continues its corporate. . .
(a) A dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs, including:
(1) collecting its assets;
(2) disposing of its properties that will not be distributed in kind to its shareholders;
(3) discharging or making provision for discharging its liabilities;
(4) distributing its remaining property among its shareholders according to their interests; and
(5) doing every other act necessary to wind up and liquidate its business and affairs.
(b) Dissolution of a corporation does not:
(1) transfer title to the corporation's property;
(2) prevent transfer of its shares or securities, although the authorization to dissolve may provide for closing the corporation's share transfer records;
(3) subject its directors or officers to standards of conduct different from those prescribed in IC 23-1-33 through IC 23-1-37;
(4) change:
(A) quorum or voting requirements for its board of directors or shareholders;
(B) provisions for selection, resignation, or removal of its directors, or officers, or both; or
(C) provisions for amending its bylaws;
(5) prevent commencement of a proceeding by or against the corporation in its corporate name;
(6) abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution; or
(7) terminate the authority of the registered agent of the corporation.