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ACME signs a service contract with a minimum term of 18 months. Acme then winds up and folds. What happens to a company’s ongoing contractual liabilities when the company gets terminated?

Just to clarify, acme is receiving and paying for a service, not providing and charging money for it.

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  • If nobody acquires any remnant, well, the company doesn't exist anymore.
    – Jon Custer
    Aug 15, 2023 at 12:45
  • What is a remnant? Aug 15, 2023 at 14:59
  • In the process of winding up a company, some portion may be sold or transferred to another entity (or multiple entities). If the "fold" is from bankruptcy, the court will oversee what rights and responsibilities will go with that transfer.
    – Jon Custer
    Aug 15, 2023 at 15:02

1 Answer 1

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A company with ongoing obligations cannot be voluntarily deregistered or wound up if it is solvent

There are a number of criteria that must be satisfied before a company can be voluntarily deregistered or wound up.

One of those is that the company cannot be conducting a business: having ongoing obligations under a contract is conducting a business. Another is that the company has no debts: a contractural obligation is a debt, albeit a contingent one.

The company would have to find another person to take over the obligations under the contract. The contract would need to allow transfer of the obligations or the agreement of the beneficiary would be needed.

An insolvent company must be liquidated

A holder of a warranty is an unsecured creditor of the company. They would make a claim to the liquidator who would (or a court would) assess the value of the warranty and therefore the value of the creditor’s debt which would rank alongside all other unsecured creditors. Factors that would be relevant would be the value of the thing under warranty, how often warranty claims on similar things have arisen, and the cost of typical repairs.

After the liquidator has realised the assets, they then distribute the cash to, in order:

  1. The costs of liquidation are paid first to ensure there is a professional available to complete the liquidation transition.
  2. Next, secured creditors receive a payment if they hold security over the company’s assets. This is someone who has a registered security Interest or mortgage over the company
  3. Priority unsecured creditors (also known as employees) share any remaining surplus;
  4. Finally, unsecured creditors (such as customers, contractors, and suppliers) receive payment;
  5. Shareholders come last in the order of priority.

Creditors with security over particular assets (such as a mortgage over real property or a registered interest over personal property like a motor vehicle) are entitled to reimbursement from the proceeds from that property before any residual is placed in the general pool.

Around 90% of liquidations result in zero return to unsecured creditors. So, if you prove your warranty is worth $500, you will likely receive 0% of that.

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  • What is a warranty? Aug 16, 2023 at 10:35
  • Also, just to clarify, acme had entered into a service contract wherein it would pay for and receive a service, not charge for and provide it. Aug 16, 2023 at 10:39
  • @Seekinganswers makes no difference
    – Dale M
    Aug 16, 2023 at 10:48
  • Some years ago a major British car company collapsed, and everyone who had still a warranty would have practically lost their rights. If I remember correctly anyone who bought their new car using a credit card received money from the credit card company.
    – gnasher729
    Oct 4, 2023 at 0:02

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