Is It Legal to Sell a Company That’s Involved in a Court Action?
Want to sell your company amidst a pending legal action? Want to purchase a company that might be in legal trouble? Read this article to find out whether you can.
What is a company?
A company is its own legal entity so it can sue and be sued in its own right. It can enter into contracts and can own and dispose of property and other assets. Therefore, companies can be at the centre of legal action and be subject to legal repercussions.
Essentially, if the seller has explicitly disclosed the company’s legal involvement to the buyer and they still wish to purchase, it is legal.
The seller has an implied obligation to act in good faith and truthfully inform the buyer about the company. This pre-contractual fairness principle dictates how the buyer should act when dealing with the sale of their company. This would include truthfully disclosing the company’s involvement in any legal action.
In NSW the seller is obligated to answer requisition questions from the buyer. Requisition questions can be in regards to the finite details of the company such as their transactional records. Questions may also pertain to the company’s previous legal history and government interaction. When asked these questions, the seller needs to answer the buyer honestly.
While the seller has an implied obligation to inform the buyer of the company they should also conduct their own research. When purchasing a company, buyers should undertake due diligence to find out more about the company they wish to purchase. Through conducting thorough due diligence, a buyer will be able to assess the risks and know in greater depth the company’s business value. If even after due diligence, the buyer wishes to purchase the company it would be legal.
Buyers should look carefully at documents such as income statements, profit and loss records and the seller’s reason for selling.
Evidently, it would be legal to sell a company involved in court action if the buyer is aware of it. This is unlike if the company was in the midst of a liquidation process hence making the company insolvent. Insolvent companies can be found on an ASIC register which makes clear which companies are not available to sell. If you require more information about the legalities of selling or buying a company, speak to a Business and Purchase lawyer. If you are hoping to receive more operational information, speak to a Commercial lawyer who may be able to assist.
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Chloe is an intern at Lawpath in the Content team. She currently is in her last year of studying a Bachelor of Laws with a Bachelor of International Studies at Macquarie University.