Liability for unlawful distributions

(a) A director who votes for or assents to a distribution made in violation of Code Section 14-2-640 or the articles of incorporation is personally liable to the corporation for the amount of the distribution that exceeds what could have been distributed without violating Code Section 14-2-640 or the articles of incorporation if it is established that he did not perform his duties in compliance with Code Section 14-2-830. In any proceeding commenced under this Code section, a director has all of the defenses ordinarily available to a director. (b) A director held liable under subsection (a) of this Code section for an unlawful distribution is entitled to contribution: (1) From every other director who could be held liable under subsection (a) of this Code section for the unlawful distribution; and (2) From each shareholder for the amount the shareholder accepted knowing the distribution was made in violation of Code Section 14-2-640 or the articles of incorporation. (c) A proceeding under this Code section is barred unless it is commenced within two years after the date on which the effect of the distribution was measured under subsection (e) or (g) of Code Section 14-2-640. (Code 1981, § 14-2-831, enacted by Ga. L. 1988, p. 1070, § 1; Code 1981, § 14-2-832, as redesignated by Ga. L. 1989, p. 946, § 33.) Editor’s notes. — Ga. L. 1989, p. 946, § 33, effective July 1, 1989, renumbered former Code Section 14-2-831 as present Code Section 14-2-832. COMMENT Source: Model Act, § 8.33. This section preserves the essential features of director liability for unlawful distributions formerly found in § 14-2-154. Subsection (a) provides that if it is established that a director failed to meet the standards of conduct of Section 14-2-830 and voted for or assented to an unlawful distribution, the director is personally liable for the portion of the distribution that exceeds the maximum amount that could have been lawfully distributed. It also expressly preserves for a director all defenses that would ordinarily be available, notably the common law business judgment rule. The explicit reference in subsection (a) to the availability of defenses ordinarily available to a director was formulated somewhat more narrowly in former § 14-2-154(c), which provided a defense ‘‘if he relied and acted in good faith and upon financial information . . . represented . . . to be correct. . . .’’ Subsection (b) provides that a director who is compelled to restore the amount of an unlawful distribution to the corporation is entitled to contribution from every other director who could have been held liable for the unlawful distribution. This preserves the approach of former § 14-2-154(e). The director may also recover the amounts paid to any shareholder who accepted the payments knowing that they were in violation of the statute. A shareholder who receives a payment not knowing of its invalidity is entitled to retain it. This follows former § 14-2-154(d). 255 14-2-832 CORPORATIONS & PARTNERSHIPS T.14, C.2, A.8, P.4 Subsection (c) limits the time within which a proceeding may be commenced against a director for an unlawful distribution to two years after the date on which the effect of the distribution was measured. Formerly § 114-2-154(f ) provided a six year statute of limitations. Georgia’s former statute was among the longest in the nation, and was inconsistent with other provisions of the Code that attempt to clear up contingent claims in shorter periods. The provisions of Sections 14-2-1406 and 14-2-1407, dealing with claims upon dissolution of a corporation, for example, have been shortened to two years. Cross-References Director standards of conduct, see § 14-2-830. ‘‘Distribution’’ defined, see § 14-2-140. Distributions generally, see § 14-2-640.