10. Sunland Corporation issued dividends to its shareholders. Each shareholder w

Question

10. Sunland Corporation issued dividends to its shareholders. Each shareholder was aware that the corporation would be insolvent and unable to pay its creditors following the dividend distribution. Philibus Co. was one such creditor. Under the Model Business Corporation Act (MBCA), primary liability to Philibus Co.: A. lies with the shareholders because they received the distribution from the corporation with knowledge of the impending insolvency. B. does not lie with the shareholders because they can never be held liable to creditors of the corporation. C. lies with the directors because they authorized the unlawful distribution of dividends D. does not lie with the directors because it is their duty to place the interests of the shareholders above everything else. E. None of the above answers is correct.

Explanation / Answer

Correct answer is option C i. lies with the directors because they authorised the unlawful distribution of dividends.Because a corporation could pay a dividend only if,after the payment of dividend,the corporation is able to pay its creditors.Therefore,the issue of dividends by sunland corporation to its shareholders is unlawful because the corporation would be insolvent and unable to pay its creditors following the dividend.

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