Hello all
Client has Company, which has been running at a loss for the last few years. It is now being pursued for a relatively small sum (£1600) for breach of contract, although client says other party breached the contract first. Even though the amount isn't huge, the company position is such that it just manages to pay the bills and a very small salary to the director. Court proceedings have been started.
The client has a dormant company and is wondering if it is possible to start using this and eventually wind up the first company to avoid having to pay if the court grants judgement against his first company. If he winds up the company, assets are such that he will be unable to repay the money he has invested. There are no other creditors, just the possibilty of the CCJ. He is just trying to keep going and hopefully start making a profit again.
Is this scenario legal or ethical? Also if he winds up the company, he will obviously be unable to use the losses incurred if and when trade picks up.
I'd be very grateful for any advice and opinions thanks
Replies (7)
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Not sure about this one...
A voluntary striking off won't be possible due to the legal proceedings so it would need to be the liquidation route if you want to wind up the company. This can cost upwards of £3,000, which is more than the sum being sued for.
You can't take the assets of one company and transfer them into another for the purpose of avoiding the first company's debts. This is known as known as asset stripping, and is illegal.
Odd behaviour
The client says that the other party breached the contract first, but is looking to get away from a CCJ they see as inevitable. If the other party breached contract first then is there a reason why they are not seeking to get the claim struck out on that basis.
I am always suspicious of clients who claim they are in the right now, but are determined to take actions that are, at best, ethically dubious anyway.
Unethical
It's unethical - your client is trying to get away from paying what might well be due to someone else. That's scummy behaviour. Personally I'd kick them into touch but then I have scruples.
If the company is running at a loss then why not stop trading entirely?
Ducking and Diving
I had a client do just what you've outlined to put some distance between him and potential legal actions (not CCJs, but claims in tort). The possibility of the claim was adjudged remote enough not to constitute a contingent liability - the "threat" came from a wealthy competitor firm with a history of ruinous and malice-driven claims designed to put small-fry out of business - and so a voluntary strike-off was favoured. (Footnote: in the event, the claim did not materialise).
Client had to sweat it out during the strike-off period that no legal action would commence. Your client's legal action has already commenced, so you already have the contingent liability. So no voluntary strike-off.
Even after the strike-off it is possible my client might be pursued through the courts in his role as a former director. Going the Phoenix route means no guarantee of immunity; it just makes one a more difficult target to hit. In your client's case, the creditor could quite possibly apply for the dissolved company to be reinstated (because their potential creditor has already crystallised, prior to any strike-off application).
The above should be sufficient to dissuade your client. If not, then you might assure him the costs of dotting the i's and crossing the t's in such a transfer would be likely to exceed £1,600.
btw hatching plans for clients to avoid legitimate debts does come rather near the line so far as ethics are concerned. In my case, I felt the client had the moral high-ground to tip the balance. But I empathise with you - having clients turn up with such partly-hatched plots does rather put you on the spot, and can easily suck you in. I suspect my client got his initial ideas from the UKBF forum.
Further to my last comment
Your client may be best letting the court action play out. If he wins, great! If he loses, it will be for the telecoms company to enforce it and petition to liquidate the company.
Your client can start a new business using the dormant company but, in my view, must not take any assets out of the old company (which looks like it is insolvent).
It may be wise to speak to an insolvency practitioner if he wishes to wind up before all liabilities (including the court action) are satisfied.