Rights of Rescission on Contract Entered Into With a Corporation That is Suspended

In California, an entity that has been suspended is disqualified from exercising any right, power or privilege as an entity during the time of the suspension. Therefore, the suspended entity 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 – but not at the option of the suspended entity. (Calif. Rev. & Tax Code §23304.1)

Any party that enters into a contract with a suspended entity should immediately determine whether or not that party wants to rescind the contract. The reason that an immediate decision is needed is because the right to rescind the contract is not permanent; the right to rescind may only exist during the time that the entity remains in a suspended status.

A suspended entity has the ability to revive the entity by filing an application with the California Secretary of State. In conjunction with the filing of the application, the suspended entity must (1) pay all delinquent taxes owed, including penalties, fees and interest, (2) file any delinquent tax returns, and (3) file a reviver request form. Additionally, at the option of the suspended entity, it may file an application to seek relief from the voidability of its contracts. If such an application is filed, so long as the contracts were not previously rescinded while the entity was suspended, the entity receives relief from the voidability of its contracts. Therefore, any party that wants to avoid a contract entered into with a suspended entity must move quickly to rescind the contract before the entity is revived and before the entity obtains relief from the voidability of its contracts