If a company forfeits its status as a corporation and reverts to “sole proprietor” status, does that void a pre-existing contract?

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If a company forfeits its status as a corporation and reverts to “sole proprietor” status, does that void a pre-existing contract?

Company A is a US corporation. It signed a contract with a Company in Europe 12 years ago. Then 5 years later, Company A forfeits its Corporate Status and reverts back to a sole proprietorship.The contract states that if a business is sold or transferred, that voids the contract. There is no “severability” clause in the contract. Does the change in status of Company A invalidate the original contract? Must a new contract be written and signed?

Asked on July 11, 2012 under Business Law, Maryland

Answers:

FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

Whether or not the contract that you are writing about is deemed "void" if a corporation who is a party to it reverts to a sole proprietorship (which it cannot do so as a matter of law) depends upon if the contract has an assignment clause within it.

If a business is held as a corporation and loses its good standing corporate status, then its assets (such as a contract) most likely will have to be assumed or purchased by some other entity or person if it ceases operations.

If this is what happened, one needs to carefully read the contract at issue to see if the contract allows for an assignment or that a whole new contract was entered into between one party that did not lose its good standing as a corporation and the entity that did.

I suggest that a business attorney be consulted to carefully read the document you have written about and give a legal opinion in that your answer lies in the contract itself and any subsequent signed documents after the contract was entered into.


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