Corporations have been held to be equivalent to humans in exercising various rights and obligations under the law. They can engage in business, be sued, sue, pay taxes, hire people, rent premises and contribute to political campaigns, etc.
But under certain circumstances the corporation is barred from exercising rights within California. The use of the California courts, whether voluntary in being a plaintiff, or involuntary in defending a lawsuit, can be barred should the corporation be “suspended.” This article shall discuss what that means.
The Basics of Suspension in California:
A suspended corporation may not prosecute or defend an action in a California court.
A corporation may be suspended for at least one of the following reasons:
- Failure to file one or more tax returns. Cal Rev. & Tax Code Sec. 23301.
- Failure to pay the business' tax balance due. This can include the penalty for failing to file the annual Statement of Information with the Secretary of State. California Corporations Code Section 2205.
Timberline, Inc. v. Jaisinghani, (1997) 54 Cal. App. 4th 1361.(Stating a suspended corporation is disqualified from exercising any right, power, or privilege, including prosecuting or defending an action, or appealing a judgment).
A suspended corporation may not prosecute or defend an action in a California court. (Ransome-Crummey Co. v. Superior Court [54 Cal.App.4th 1366] (1922) 188 Cal. 393, 396-397 [205 P. 446]; Alhambra-Shumway Mines, Inc. v. Alhambra Gold Mine Corp. (1957) 155 Cal.App.2d 46, 50-51 [317 P.2d 649].)
Nor may a suspended corporation appeal from an adverse judgment (Boyle v. Lakeview Creamery Co. (1937) 9 Cal.2d 16, 20-21 [68 P.2d 968]; Gar-Lo, Inc. v. Prudential Sav. & Loan Assn. (1974) 41 Cal.App.3d 242, 245 [116 Cal.Rptr. 389]), or seek a writ of mandate (Brown v. Superior Court (1966) 242 Cal.App.2d 519, 635 [51 Cal.Rptr. 633]).
However, if the corporation's status only comes to light during litigation, the normal practice is for the trial court to permit a short continuance to enable the suspended corporation to effect reinstatement (by paying back taxes, interest and penalties) to defend itself in court. (See, e.g., Schwartz v. Magyar House, Inc. (1959) 168 Cal.App.2d 182, 190 [335 P.2d 487].)
In a number of situations the revival of corporate powers by the payment of delinquent taxes has been held to validate otherwise invalid prior action. (Traub Co. v. Coffee Break Service, Inc. [(1967)] 66 Cal.2d 368, 370 [57 Cal.Rptr. 846, 425 P.2d 790]; Diverco Constructors, Inc. v. Wilstein [(1970)] 4 Cal.App.3d 6, 12 [85 Cal.Rptr. 851]; A. E. Cook Co. v. K S Racing Enterprises, Inc. [(1969)] 274 Cal.App.2d 499, 500 [79 Cal.Rptr. 123]; Duncan v. Sunset Agricultural Minerals [(1969)] 273 Cal.App.2d 489, 493 [78 Cal.Rptr. 339].)
In all of the above cited cases it was held that the purpose of section 23301 of the Revenue and Taxation Code is to put pressure on the delinquent corporation to pay its taxes, and that purpose is satisfied by a rule which views a corporation's tax delinquencies, after correction, as mere irregularities. This reasoning is in accord with the language in Boyle v. Lakeview Creamery Co., 9 Cal.2d 16, declaring the legislative policy of Revenue and Taxation Code provisions imposing sanctions for failure to pay taxes to be 'clearly to prohibit the delinquent corporation from enjoying the ordinary privileges of a going concern, in order that some pressure will be brought to bear to force the payment of taxes.' (At p. 19.) There is little purpose in imposing additional penalties after the taxes have been paid." (Peacock Hill Assn. v. Peacock Lagoon Constr. Co. (1972) 8 Cal.3d 369, 371 [105 Cal.Rptr. 29, 503 P.2d 285], corporation which was suspended after judgment for nonpayment of franchise taxes was entitled to pursue its appeal after it paid the delinquent tax, interest and penalties and received its certificate of revivor.)
Suspension of a corporation is thus an effort to force the payment of taxes and is normally cured with the payment of the taxes. Nevertheless, it is not an automatic process to allow full reinstatement of rights upon payment and the delay in such effort may alter significantly the posture of the prosecution or defense of a case. As a typical example, in much collection litigation it is a race to judgment among competing creditors as each seeks to obtain first rights to finite assets. If one of the plaintiff creditors finds itself suspended, months may pass before it may prosecute the action again and the other creditors would thus be given a tremendous advantage. Other similar scenarios can readily be imagined and the effect of allowing suspension for failure to pay taxes is not only to expose the entity to interest and penalties for unpaid taxes, but to give an opponent a useful tool if litigation ever ensues.