Contract With Dissolved Company: Everything You Need to Know
If a contract with dissolved company exists, the contract will stay legally valid.3 min read
2. Lawsuits and Dissolved Companies
Updated October 28, 2020:
If a contract with a dissolved company exists, the contract will stay legally valid. The only exception to this rule is if there was a lease termination clause negotiated into your contract that specifically addresses your business closing. Dissolving a company will not terminate any lease the company has including those for a real estate property, company vehicles, or other creditors.
Contract Terms for Dissolved Companies
If the contract does not include clauses related to exercising an early termination clause, there will be consequences. In some cases, the contracts will include clauses that lay out the expected penalties and fees related to early termination. In real estate, the penalties and fees are applied to compensate for the time and expense it will take to find a new tenant for the property. While the cost of the penalties and fees may be high, in some instances it will be less than the cost to finish out the contract.
If the lease does not involve include a penalties and fees clause, or you fail to pay the penalties and fees listed in the contract, legal action can be taken to enforce that the remainder of the lease is paid. The contract legally obligates you to satisfy the terms of the lease, and the courts are more likely to side with the lessor even if you are no longer using the property for business purposes.
If you are financially incapable of paying the lease provisions that you are obligated to pay, a business bankruptcy may be considered. The type of bankruptcy that is filed will depend on the business type. Businesses that are closing are limited to Chapter 7 which will erase the majority of the business debts. Farms or fisheries would normally file for Chapter 12 bankruptcy protection.
Lawsuits and Dissolved Companies
An LLC, or Limited Liability Company, is a legal business entity that is separate from its owners who are called members. This gives the members personal liability protection in the same way corporations work. At the time of formation, the articles of organization must be filed with the state business registrar. At the time of dissolution, the articles of dissolution must be filed to formally dissolve the corporation.
The ability to file suit against a dissolved corporation will depend on a variety of factors including:
- The laws of the state where the LLC was formed.
- If the company followed the proper procedures to dissolve.
- The length of time that has passed from the time of dissolution.
If the LLC has ceased business but not formally dissolved, it can be sued until they follow the legal procedures. LLCs must follow the laws of the governing state, and they vary by state. The state laws also include rules related to suing dissolved LLCs. Due to the changing variables, a lawyer is recommended if a lawsuit is filed against a dissolved LLC.
If the LLC follows the proper procedures, and the company is dissolved legally, the time allowed to file suit is limited and will eventually end. In many states, this timeframe is three years. At that point, the LLC is considered canceled, and no lawsuits can be filed. In some states, the timeframe to file suit is in conjunction with the public notification requirement. The public notification must be placed in a newspaper and include:
- A declaration that the company is going out of business.
- The date of closing.
- An address to file a claim.
- If required, the last date when a suit can be filed.
The notification, depending on the state, may need to be published more than once.
If a suit is filed within the approved timeframe, other obstacles that may occur include:
- Facing a limit to how much money can be received in a judgment.
- Only being able to collect from any assets that have not been distributed or assets that members received after liquidation.
If the LLC members have engaged in wrongdoing, an attempt to remove the liability from the members is possible. Piercing the corporate veil is only allowed in very specific situations such as fraud. If successful, the member's personal assets may be seized to fulfill the judgment.
If you need help with dealing with a contract with a dissolved company, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.