Washington Law Review
The Federal Constitution provides that Congress shall have the power to establish uniform bankruptcy laws. This does not deprive the states of their power to enact insolvency laws but merely suspends the operation of such laws where enforcement would conflict with the Federal Act. Whether an insolvency statute is considered a bankruptcy act depends on whether the debtor is given an absolute discharge. The whole of the state act or merely the discharge portion may be invalid depending upon whether its other sections are inseparably interlaced with the discharge provision. If the highest court of the state declares its discharge provisions suspended (courts often say void) but the rest of the act valid, no federal question is presented. The Uniform Business Corporations Act provides for dissolution of a corporation when its liabilities exceeds its assets (bankruptcy) at the instance of (i) a shareholder (voluntary petition), (2) a judgment creditor, or (3) a creditor whose claim has been admitted (involuntary petitions). The trustee is then empowered to wind up the corporation, collect all debts, convert the assets into cash, and pay all claims according to their respective priorities. This dissolves the corporation, and thus, in effect, absolute discharge of the corporate debtor has been accomplished without full payment of its debts. Moreover, except by specific statute, individual shareholders are not personally liable for corporate debts by virtue of the corporate entity doctrine. Thus, it is submitted, it logically follows that the force of at least the above sections of the Uniform Business Corporations Act has been suspended except in instances where the Federal Act is not applicable.
Jennings P. Felix,
The Effect of the National Bankruptcy Code Upon the Uniform Business Corporations Act,
23 Wash. L. Rev. & St. B.J.
Available at: https://digitalcommons.law.uw.edu/wlr/vol23/iss1/6