We get a lot of calls from clients having received letters promising that all their business debt problems will be gone, usually by the way of Company A buying Company B for the nominal sum of £1. As you read further into it there are also fees of £5,000 to pay to handle the process.
But, paying only £1 to get rid of business debt has to be a perfect solution right? Well, there seems to be a couple of problems that will soon raise their head.
Once Company A has bought Company B for a £1 it is theirs to do with what they want.
However, should they choose to do something that brings it to the attention of the authorities then questions will be asked of the original directors, those who ran up the business debt in the first place.
This is because as a company director it is your duty to ensure the smooth running of the company, and if it is proved that your actions built up a debt and then you sold it you will still be liable, more on this here.
It’s a bit like being caught speeding and then selling your car the next day, even though you have sold the car you’re still responsible for the ticket!
The other obvious thing to talk about is the £5,000 handling fee, why pay this to have a slightly dubious company sale process initiated when this is the average fee charged by a licenced insolvency practitioner to liquidate and close your company in the correct and proper manner and have all the debts resolved in the right way.
Recent case example
In one recent case we have advised on, our client was approached by a firm after they had received a Winding Up Petition from HMRC. The firm offered to buy our clients company for a nominal fee of £1 and then to sell the assets back to the director. For this service they would charge the fore mentioned fee of £5,000!
After instruction took place and fees paid, the director was removed, and new director appointed and share transfer took place.
The company’s assets were then valued, and the purchasing firm came at the director asking for a further sum in the region of £20k to buy the assets from them.
However, contrary to the director believing that the company would be then be liquidated in a voluntary capacity (Creditors Voluntary Liquidation), it was actually wound up by HMRC and the Official Receiver was appointed under a Compulsory Liquidation.
The director was also of the understanding that he was no longer part of any insolvency process for his former company, but he had been mis-informed.
Because the company was under his stewardship when the Winding Up Petition was filed, and at the point the company became insolvent, the Official Receiver has requested that they come forward to answer questions about their conduct.
So was the business debt gone?
Well no. It wasn’t. The director is now both out of pocket, under investigation from the Official Receiver and unable to purchase the assets for his newco.
In this case, at best, the process is superfluous and certainly does not follow best practice for directors willing to turnaround these types of restructuring scenarios.
The director will not only be investigated for his part in the insolvent position of the company, but also the manner in which the company handled in and around the time of the sale.
Ben Westoby, Senior Client Manager, Forbes Burton