Also known as: fair and adequate provisions · adequate provision · reasonable provision
Written by attorneys · grounded in primary & secondary sources — see below
A requirement imposed on directors of a dissolved corporation to set aside sufficient assets to satisfy known and reasonably anticipated claims before distributing any remaining assets to shareholders.
After an SEC investigation began, Omega Securities dissolved and returned all client balances plus vendor payments. The board created a $100,000 reserve based on counsel's low-six-figure estimate and distributed the rest to shareholders. When multimillion-dollar claims later surfaced, the modest reserve left the corporation unable to meet its obligations.
Republic Stage paid its completion-guarantee and union creditors in full after dissolution. It received a detailed copyright demand letter but set aside only ten percent of the asserted amount before distributing the balance to its shareholder. The claimant later sued, alleging the reserve failed to cover the known contingent liability.
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Alpha Vital paid its sole trade creditor in full and placed $25,000 in a labeled reserve for a possible Medicare recoupment ranging up to $160,000. It then distributed the remaining cash to its shareholder without further investigation or notice. The government later asserted a larger claim against the dissolved entity and the recipient.
CloudStart's director obtained counsel estimates for two contingent claims and created a $500,000 reserve before distributing the balance to former shareholders. Actual liabilities exceeded the reserve by a wide margin, exhausting corporate assets and prompting personal claims against the director for improper distributions.
Summit BuildCo distributed all remaining cash and equipment to shareholders immediately after dissolution while subcontractor invoices and a latent defect investigation remained unresolved. The directors later faced claims that they had failed to satisfy or reasonably provide for those obligations before any equity distributions.
Directors must discharge known claims or make reasonable provision for their payment before distributing any remaining assets to shareholders. This includes paying undisputed debts in full and setting aside reserves calibrated to reasonably foreseeable contingent liabilities identified through demand letters, audits, or investigations.
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Reliance on counsel's estimate can support a finding of reasonable provision when the reserve is set at or above the projected range and undisputed creditors are paid first. However, if actual claims greatly exceed the reserve and no further protective steps are taken, the provision may be deemed inadequate.
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Directors may distribute remaining assets to shareholders only after all known claims have been paid or reasonable provision has been made for both fixed and contingent liabilities. Distributions that leave the corporation unable to meet reasonably anticipated obligations violate the statutory priority of creditors over equity holders.
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A modest reserve equal to a small fraction of a known but unliquidated claim usually fails to constitute adequate provision. When a demand letter or audit correspondence places the corporation on notice of substantial exposure, the board must allocate resources commensurate with the disclosed range rather than a minimal percentage.
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…at least to the performing physician and his staff, to the facilities involved, to the availability of after-care, and to adequate provision for any complication or emergency that might arise. The prevalence of high mortality rates at illegal "abortion mills" strengthens, rather than weakens, the State's interest in regulating…