Malcolm Rivera
Signing a contract with a suspended corporation may not constitute fraud, but it is a risky move. A suspended corporation is typically barred from conducting business, and any contracts entered into during this time are voidable at the option of the other party. This means that the other party must act quickly to rescind the contract before the corporation's status changes or they obtain relief from contract voidability. In California, a suspended corporation is disqualified from exercising any rights or powers, including entering into binding and enforceable contracts with third parties. However, the onus is on the other party to decide whether to rescind the contract, and they must do so while the corporation remains suspended. While this may not be considered fraud, it is a complex legal issue, and specific state laws vary, so seeking expert legal advice is always recommended.
| Characteristics | Values |
|---|---|
| Can a suspended corporation sign a contract? | A suspended corporation lacks the legal ability to enter into a binding and enforceable contract with a third party. However, the contracts entered into during a time of suspension are not void; rather, the contracts are voidable at the option of the other party. |
| What happens if a suspended corporation signs a contract? | Contracts involving a suspended corporation can be voided and the corporation can’t sue or defend itself against lawsuits. The other party can void the contract. |
| What happens if the other party wants to enforce the contract? | The other party must apply for relief from contract voidability. |
| What happens if the other party wants to void the contract? | The other party must move quickly to rescind the contract before the suspended corporation is revived and before the corporation obtains relief from the voidability of its contracts. |
| What is contract fraud? | Contract fraud involves a fraudulent misrepresentation that causes the plaintiff to misunderstand the nature, substance, or consequences of what they are agreeing to. |
| What are the types of misrepresentation? | Innocent, negligent, and fraudulent misrepresentation. |
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What You'll Learn
Contract voidability and suspended corporations
A corporation may be suspended by the Franchise Tax Board (FTB) for failure to pay taxes, penalties, fees, or interest, or file a return with the FTB. Suspension by the FTB means the corporation is disqualified from exercising any right, power, or privilege as an entity during the time of the suspension. This includes the legal ability to enter into a binding and enforceable contract with a third party.
However, contracts entered into during a time of suspension are not automatically void. Instead, they are voidable at the option of the other party, but not at the option of the suspended entity. This means that any party that enters into a contract with a suspended entity should immediately decide whether or not they want to rescind the contract. The right to rescind may only exist during the time that the entity remains in a suspended status, so it is important to act quickly.
If a corporation has been suspended, it can be revived by filing an application with the California Secretary of State (SOS). In addition, the suspended entity must pay all delinquent taxes, fees, and interest, file any delinquent tax returns, and file a reviver request form. The entity may also file an application to seek relief from the voidability of its contracts. If such an application is filed before the contract is rescinded, the entity will receive relief from the voidability of its contracts.
To obtain relief from contract voidability, the corporation or other entity must complete the Application of Relief from Contract Voidability (FTB 2518BC) and pay a fee of $100 per day, not exceeding the total amount of tax owed for the time frame requested. Once relief is granted, the FTB will issue a Certificate of Relief from Contract Voidability. It is important to note that general partnerships, limited partnerships, and limited liability partnerships may not request relief from voidability.
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Misrepresentation and contract fraud
Signing a contract with a suspended corporation may not constitute fraud, but it is still an invalid contract. A corporation suspended by the Secretary of State is not subject to contract voidability, and the suspended entity cannot enforce the contract unless it obtains relief from contract voidability.
In contract law, fraudulent misrepresentation occurs when someone tricks another person into signing a contract by lying or hiding important facts. This goes against the basic idea that contracts should be honest and fair. If proven in court, the party that was tricked can claim damages and rescind the contract.
To determine whether fraudulent misrepresentation occurred, the court will look for six factors:
- That the defendant knew that the representation was false or that the defendant made the statement recklessly without knowledge of its truth.
- That the fraudulent misrepresentation was made with the intention that the plaintiff rely on it.
- That the plaintiff relied on the fraudulent misrepresentation.
- That the plaintiff suffered harm as a result of the fraudulent misrepresentation.
- Like most claims under contract law, the standard remedy for fraudulent misrepresentation is damages.
- The misrepresentation can happen in various ways, including written text, nods or other gestures or motions, or spoken words.
In California, a suspended entity is disqualified from exercising any right, power, or privilege as an entity during the suspension. Therefore, a suspended entity cannot enter into a binding and enforceable contract with a third party. However, the contracts entered into during a suspension are not void; they are voidable at the option of the other party but not the suspended entity.
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Fraud in the factum
A contract involving a suspended corporation can be voided, and the corporation cannot sue or defend itself against lawsuits. In California, a suspended entity is disqualified from exercising any right, power, or privilege as an entity during the suspension. This means that the suspended entity cannot enter into a binding and enforceable contract with a third party. However, such contracts are not void; they are voidable at the option of the other party.
In the context of a suspended corporation, if a party enters into a contract with the corporation during its suspension, the party may be able to claim fraud in the factum. The party may argue that they were misled about the nature of the contract or the corporation's ability to enter into a binding agreement. However, it is important to note that the right to rescind the contract due to the corporation's suspension is not permanent. The party must act quickly before the corporation is revived or obtains relief from contract voidability.
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Legal standing of suspended corporations
In California, a suspended corporation is disqualified from exercising any right, power, or privilege as an entity during the time of the suspension. This means that a suspended corporation cannot legally operate and is required to close its business and stop all business-related activities. A suspended corporation cannot sue or defend itself in court and may not be able to collect payment for services or goods provided during the suspension.
A corporation may be suspended for failure to file or pay the annual Statement of Information, failure to pay taxes or tax returns, or failure to reimburse the Victims of Corporate Fraud Compensation Fund for a paid claim. In California, it is a misdemeanor to transact business through a suspended corporation.
When a corporation is suspended, it loses its rights to its name, and another entity may take its name during this time. A suspended corporation may be revived or reinstated, but this process requires the corporation to pay delinquent taxes, fees, and interest, file any delinquent tax returns, and file a reviver request form. The corporation must also be in good standing with the Secretary of State (SOS) to be revived.
Contracts involving a suspended corporation are not automatically void, but they are voidable at the option of the other party. This means that the other party to the contract must act quickly to rescind the contract before the corporation is revived and obtains relief from contract voidability. If the corporation is revived and obtains relief, the contract will no longer be voidable.
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Penalties for corporations suspended by the SOS
A corporation suspended by the Secretary of State (SOS) is prohibited from legally operating within the State of California. This suspension can occur due to a failure to file certain documents, such as a Statement of Information with the SOS, or a failure to meet tax requirements, including unpaid taxes, unfiled tax returns, and unpaid penalties and interest.
The penalties for corporations suspended by the SOS can include:
- A $250 penalty imposed by the SOS.
- Loss of the right to use the corporation's name.
- Loss of the ability to legally conduct business, including entering into binding and enforceable contracts. Any contracts entered into during the suspension are voidable at the option of the other party.
- Loss of tax-exempt status, with a $2,000 penalty per tax year for failure to file missing tax returns within 60 days of receiving a written demand.
- Exposure of the business owners to personal liability for the debts, obligations, and liabilities of the business.
To revive a suspended corporation, the following steps must be taken:
- File an application with the California SOS.
- Pay all delinquent taxes, including penalties, fees, and interest.
- File any delinquent tax returns.
- File a reviver request form.
- Optionally, the corporation may file for relief from the voidability of its contracts entered into during the suspension period.
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Frequently asked questions
Contract fraud or misrepresentation renders the contract void. The injured party can then sue the party responsible for the misrepresentation for their losses.
Misrepresentation can be categorized as innocent, negligent, or fraudulent. Innocent misrepresentation occurs when the defendant is unaware that their statement is untrue. Negligent misrepresentation happens when a statement is false, but the defendant does not verify it. Fraudulent misrepresentation is when the defendant knowingly makes a false statement to mislead the plaintiff.
Signing a contract with a suspended corporation does not constitute fraud. However, the contract is voidable at the option of the other party. The other party must decide quickly, as the right to rescind may only exist during the entity's suspension.
A suspended corporation can apply for relief from contract voidability. The corporation must file an application, pay delinquent taxes and fees, file delinquent tax returns, and submit a reviver request form.
