Legal Question in Business Law in California

Here we have three corporations. Let's call them X (your corporation); Y, the suspended corporation; and Z, the new corporation which is (at least for now and possibly voidably) co-owned by X and Y.

First, let's be clear that the main purpose of suspending corporations is to oblige them to pay their taxes. Almost all the law concerning suspension and its consequences is in the Revenue and Taxation Code, not the Corporations Code. The most common reasons for suspension are failure to pay franchise taxes or to file a franchise tax return.and, less often perhaps, failure to file a periodic statement of officers, etc. with the Secretary of State.

A suspended corporation can obtain reinstatement by filing the tax return or statement of officers (Corporations Code 2205(d)), paying its taxes and all penalties, and thus obtaining a "certificate of revivor" - Revenue & Taxation Code section 23305. Once it has complied or substantially complied (R&TC;Code 23301, 23301.5) it may prosecute and defend actions even if it has not yet received a certificate of revivor.

So, it is relatively easy for a suspended corporation to get back into the good graces of the law, assuming its managers have some incentive to do so, and some money to pay up.

On the other hand, if your corporation X wants to nullify its voidable contract with corporation Y, X will have to go to court to seek court-ordered rescission, which the court must order, provided (a) corporation Y receives full restitution of any benefits it conferred under the contract, and (b) was allowed a reasonable opportunity to "cure" the voidability. Until a court gives a rescission order, the contract remains enforceable (R&TC;23304.5).

The result in your situation will depend upon how badly Y's owners and managers want to preserve their interests in Y and Z, and whether Y has, or can obtain, the funds needed to pay its tax bills. Also, it will depend upon whether X decides to spend the time and money to take Y to court and whether X can make restitution to Y for any benefits Y has conferred (such as investment in Z) upon X.

In the meantime, assuming Z has filed and paid its taxes and S/S statements, Z is unaffected by Y's suspension and has its full corporate powers, despite Y's situation.

I think an overall analysis of the positions of X, Y and Z should be made to determine whether X should assist Y, take Y to court for rescission, or follow some other course of action. I cannot assume what Y would do, if sued, and advise a course of action without knowing more about Y's resources, the importance of the Z deal to Y, and the quality of the relationship between X and Y.

Please feel free to contact me directly with any further questions (without obligation, of course).