Newco paying Oldco Debt

Newco paying Oldco Debt

Didn't find your answer?

We have a Ltd Co Client who has been trading for a short time in a very specialist field.  We have just discovered that his father had a Company in the same industry that was liquidated and that he has taken over the business and all the contracts. Its all legit dad has no role at all in Newco son who formed Newco had worlked for dad for years in Oldco and is very qualified in this industry. Oldco was dealt with properly it wasnt just allowed to die.

The issue is that there is one supplier in Europe of a particular specialist component and son agreed to pay this supplier dads outststanding debt of £200,000.00 in order to become the exclusive importer of the product into the UK,(as his dad was) this means that he gets all the jobs that use this component. I cannot be more specific as if I do I will identify the client as the work is so exclusive.

How do I treat the repayment of Oldco debt, He has taken this on personally but without it the exclusive import licence Newco could not trade. He has been discharging the debt with Co funds.

Replies (9)

Please login or register to join the discussion.

avatar
By Phil Rees
03rd Oct 2013 13:00

I fear that it is not deductible

You say that he made the payment to secure an advantage. That looks like capital to me.

I will be interested to see what other people say.

Thanks (0)
By ccassociates
03rd Oct 2013 13:04

Yes

I can see that so can i treat it as a credit in the DLA

Thanks (0)
Replying to StacyJCastillo:
By johngroganjga
03rd Oct 2013 13:24

Debit not credit

ccassociates wrote:

I can see that so can i treat it as a credit in the DLA

Thanks (0)
By johngroganjga
03rd Oct 2013 13:23

Contradiiction

You say "Oldco was dealt with properly it wasnt just allowed to die" but then you say that there remains an outstanding creditor of Oldco (who presumably Oldco is unable to pay).  Sounds like Oldco has gone into insolvent liquidation leaving creditors unpaid.  Which is it?

Thanks (0)
By ccassociates
03rd Oct 2013 13:34

@johngroganjga

I have only just discovered this but am given to understand that Oldco went into insolvent liquidation and that this supplier was the major creditor. Son took on the debt and in doing so "bought the contracts" leaving Oldco able to pay the rest of the creditors and close down.

The credit I want to introduce to the DLA is the purchase of the licence by son to set against the debit caused by paying the debt with Co funds

Interest is also being charged

Thanks (0)
Euan's picture
By Euan MacLennan
03rd Oct 2013 13:42

I am confused

If "Oldco was dealt with properly it wasnt just allowed to die", how did Oldco have an "outststanding debt of £200,000.00"?

Why has the son "taken this on personally but ... has been discharging the debt with Co funds"?

It seems to me that Newco is paying £200,000 to the supplier for an exclusive import licence to enable it to trade.  Provided the licence is in Newco's name, I agree with Phil that it would seem to be a legitimate business expense on an intangible asset.

Thanks (0)
By johngroganjga
03rd Oct 2013 13:47

You mean the son will buy the licence personally then sell it to the company?  Yes the company's purchase will be a credit to the DLA.

But the payments to the supplier can't both be a purchase of a licence and a repayment of debt on behalf of Oldco.  Which is it?

If the company wants the licence why doesn't it buy it directly instead of interposing the son unnecessarily.  Surely that will multiply the paper-chase and thus the lawyers' fees.

Thanks (0)
By ccassociates
03rd Oct 2013 13:58

Deal is done

John The deal has been done I just get to sort out the mess as usual

Thanks (0)
By johngroganjga
03rd Oct 2013 14:20

Well if you have documents saying company has acquired a licence from the son for £200,000 then you just account for that transaction don't you?  It's obviously a related party transaction with all the usual disclosure requirements.  Tax consequences of that purchase are I believe as set out by others above. 

If you are also advising the son as an individual you need also to look at his purchase of the licence from the supplier and advise him accordingly.  If the documents say he bought the licence for £200,000 with money borrowed from Newco there has been no repayment of Oldco's debt by Newco, which remains outstanding.   The issue suggested in the title of this thread will not be an issue at all.

I would be extremely suspicious if both purchases were not dealt with by lawyers and the parties cannot provide you with full sets of legal documents.  I would also be suspicious about the artificial sequence of events - the son being uselessly interposed in a transaction between his company and its supplier.  Are you sure supplier is not just being pad a back hander?  Keep a copy of the Bribery Act close at hand.  

Thanks (0)