It can be frustrating trying to deal with a contract dispute after a company shuts down, dissolves, declares bankruptcy, merges, or is acquired by another company. The business may try and avoid liability by claiming the contract is no longer valid or the new owner is not bound by a prior agreement. However, a contract and business litigation attorney may still be able to hold the new owner liable or seek payment for any breach of contract.
Rights and Responsibilities of a Dissolving Company
Closing a business is generally not a quick process. It may take time to dissolve the company, take an inventory of assets, get a valuation of the business, handle existing contracts, liquidate assets, pay off debts, and file dissolution papers with the state. During this time, the business may still be trying to perform under an existing contract or be trying to avoid any communication with the other business since they cannot pay or perform. This can put the business' clients, including other small businesses and vendors, in jeopardy.
When a business is closing or dissolving, there are still rights and responsibilities of the business and owners with regards to existing contracts. The business may still have the right to expect the performance of the contracts and be responsible for performing or paying on those contracts.
The first place to check for what happens after a business closes is in the contract. There may be a section in the contract about what happens in the event of a change in the business. The rights or duties of a party may be assigned if another party takes over the company. A business change may also necessitate a novation or substitution.
A well-drafted business contract agreement should provide for common eventualities, including a business changing hands or closing down. If your contracts do not provide for conditions like a closing business or sale to another company, talk to your Massachusetts business attorney about negotiating and formulating contracts that will protect your business and provide predictability in the future.
Doing Business with a Bankrupt Company
Dealing with a business that has declared bankruptcy can be complicated, especially when there are a number of competing creditors, including government creditors. Handling contracts with a business that has declared bankruptcy can depend on whether it is Chapter 11 or Chapter 7 bankruptcy. There may be a limited amount of time to assert your rights and failure to act in time can reduce your chances to recover goods or assets involved in a contract dispute.
In some situations, the business may still be engaged in business, using Chapter 11 bankruptcy to restructure the business. You may demand adequate assurance of future performance or suspend your performance under the contract when the other business is going through bankruptcy. Without adequate assurance, you may have the right to terminate your obligations under the contract.
Where a contract dispute involves payment for goods sold to the bankrupt business, you may have the right to reclaim any goods sold on credit. There may be a limited time to assert your reclamation rights and any written reclamation demand should be sent as soon as possible. Additionally, your business may have a higher priority claim to goods delivered within the 20-day period before filing for bankruptcy through an administrative expense claim.
There may also be restrictions on your rights to collect on a bankrupt business. There is generally an automatic stay on collections or repossessing property. There are exceptions to the automatic stay, and you should talk to your Massachusetts business attorney about your rights and restrictions to collect from a business that has declared bankruptcy.
Contracts With the New Owner
Mergers and acquisitions come with a lot of conditions and the acquiring company may try to get out of existing obligations or push them onto the prior owner. A new owner may claim that there were breaches of representations and warranties regarding any existing contracts. Any disputes between the new owner and the old owner should be handled between those parties.
If the new owner is liable for any existing contracts through assignment, talk to your attorney about taking action to enforce the contract or seek damages. However, if it is important for your business to have a cooperative relationship with the new owner, it may provide an opportunity to modify the contract or negotiate a new one that is mutually beneficial to both parties.
Opportunity to Get Out of a Contract
In some situations, your business may be able to benefit from a company going out of business. It may provide a way to get out of a contract or agreement that is no longer profitable or beneficial. However, it may be unclear when to decide to no longer perform under the agreement or whether you are required to continue payment or performance. Talk to your Massachusetts business law attorney about your options in looking to cancel a contract with a business that may be closing down.
Whether to Enforce an Existing Contract
Even if the business is still bound by the contract, it may not be worth the time or effort to enforce the contract with a dissolving business. The most common reason for winding down a business is because of financial problems. A closing business may not have the assets to make contract payments. Even if the business has some assets, those assets might already be subject to claims by other creditors. Talk to your business attorney about whether it is financially viable to enforce an existing contract against a closing business.
Experienced Massachusetts Business Litigation Attorneys at the Katz Law Group
The Katz Law Group has nearly 40 years of experience with business law in Worcester, Marlborough, Framingham, and the rest of Massachusetts, including contract disputes with closing businesses. Contact us online today.