How can a successor company face lawsuits?

| Jul 27, 2022 | Business Litigation |

Sometimes a business just does not work out and you find it necessary to close up shop. However, you believe you can correct the mistakes that led to the failure of your earlier enterprise through a new business. If you create a successor company, be aware of possible litigation that you might encounter.

While a successor business may afford you the chance to improve upon earlier failures, it could also expose you to liabilities that stem from your earlier company.

Successor companies and past liabilities

As Chron explains, a successor company generally bears no responsibility for past obligations involving a prior business like unpaid debts. Your company should be in the clear if you have not given any kind of consent to assume the liabilities of your past business, such as resuming payments on an old debt or taking up old contracts.

However, another party might bring a lawsuit against you for an unfulfilled contract if the party claims that your new company is basically just your old company but reconstituted under a new name. A court may find this to be the case if your new business has the exact same leadership and structure with no major distinguishing changes from your old business.

Take steps to protect your new business

If you have not formed your successor company yet, checking your old business documents may reveal language to protect any future company you would create. For example, your previous contracts may contain anti-assignment clauses that do not allow their obligations to proceed to a successor business.

If you suspect your successor company is at risk of litigation, consider any actions you should take to fulfill past obligations or establish that your new company is not liable for previous debts and contracts.

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