A director of a failing business has a substantial DLA in credit and before a winding up order, he sets up another company purely to transfer trading and protection of the DLA and duly Novates the DLA.
Can the same director acting as all three parties in seperate capacities sign a Novation document the director loan?
Replies (19)
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Protection from whom
Do you mean transferring to a new company so that the, presumably legitimate, creditors of the failing company end up losing out? Even leaving aside the moral issues that such action creates, I'm pretty sure that the veil of incorporation would be lifted if anyone challenged that action. Whether anyone would seek to do that is another question.
Powers of a liquidator
If I were appointed Liquidator of the first company, it would be quite simple - demand payment from the "new" debtor, and if it can't pay, demand payment from the director for "giving away" an asset of the company for no consideration.
It just won't achieve what the director is trying to do (which is a good thing in my book!)
Edited: On re-reading the question, are we suggesting the company is due the director the balance? If so, then it's a different kettle of fish, but still potentially challengable in respect of the transfer of trade.
Credit balance
Edited: On re-reading the question, are we suggesting the company is due the director the balance? If so, then it's a different kettle of fish, but still potentially challengable in respect of the transfer of trade.
Yes the OP says it's a credit balance, which means it's a liability of the insolvent company not an asset.
Surely the DLA credit balance would just be replaced by an intercompany credit balance - subsequently to be 'dealt with' by the liquidators - ie becoming an unsecured creditor and taking a % of the residual net assets where applicable.
Then in the 'newco' the difference between the liquidators distributions and the initial amount of the debt to be written off as a loss in the period of strike off.
I'm not sure that the moving of the loan balance would increase recoverability - all that it means is it transfers the insolvency issue to the new company - which in essence may well be insolvent from day one as and when the liquidation is complete.
OP also mentions transfer of trade
We don't have enough info to be clear, but I'd guess that the trade has transferred to Newco, with payment being by way of the DLA. That leaves Oldco with no assets and some liabilities, and Newco can trade on as if nothing has happened.
As I say, as Liquidator I would be carrying out a close investigation of this transfer of trade to ensure that fair value was "paid". Add in IA86 s216/217 issues as well, and there are potentially problems galore in store for the director.
Preferential treatment
Whilst I appreciate it is a liability, it seems to me that the arrangement is to give the director preferential treatment on winding up. By transferring the DLA to a new company, they intend to be able to get all of their money back, whilst other creditors will only get a fraction. Given the intention is to transfer the trading as well, it would seem some assets are going too. Like I said, protection from who?
To go back to the actual question asked by the OP, in my opinion it would be most unwise for the director in question to be sole signatory of all the relevant documents in order to guard against, heaven forbid, any appearance of a conflict between his personal financial interests and his duty as director of the failing company.
Legal Position v potential problems
I guess from a legal viewpoint there is nothing to stop a sole director of two companies signing for the companies and for himself personally. If he is sole director, there seems no other way the documents can be signed. I would of course assume that he has also minuted decisions properly and declared interest in transactions to shareholders (?himself again).
In this case I think the bigger problem is the insolvency law on Preferences as highlighted by stepurhan and the transaction must be open to challenge by a liquidator.
How a preference?
The Director get a preference by receiving repayment of his DLA balance (value of assets and business) in full whereas we assume other creditors will get little or nothing.
Are we to assume, then, that the Director is extracting the assets in lieu of repayment?
Or, as I had previously, that the debt is being swapped with a debt to newco prior to the 'other' creditors receiving settlement?
In my opinion, both the legal and liquidation implications of the two transactions are fundamentally different
Appalling
So you have a director that repeatedly walks away from companies. He would be legally exposed for the reasons already given and I hope someone does pursue him through the courts this time. I am aware of the transfer of trading being and undervalue and this is being dealt with, my issue is company 'B' derived its credit DLA from a previous liquidated company 'A' many years ago and now upon a winding up order of 'B' transferred it again to Company 'C'.
I am also concerned that you so casually dismiss the transfer of the trade at undervalue as "being dealt with" in this situation. I hope you do not have a professional qualification, because assisting a company director in evading his responsibilities to other creditors could come back to bite you as well.
There is a single solution - get legal advice.
"But, some guy on AccountingWeb said..." isn't really a legal argument
So you are appalled as well
Good on one level, but you might have saved yourself some trouble by saying that at the start.
Whilst they were made advising against it, I think my original points stand. The director is clearly acting to the detriment of creditors and it should be possible to lift the veil of incorporation to pursue them directly. Definitely a case for face-to-face legal advice though. I'm not a legal expert and it seems highly likely that there are other pertinent facts that could affect any action.
Potential issue
Just thought of a potential problem.
If you are an ordinary creditor, how do you know that the director is the one that has authorised the transfer of trade and creditors? Is this actually speculation on your part in any way? The reason that everyone has been responding as if you were acting for the director is you have stated this as fact. Only someone on the inside would normally be in a position to know something like that. If you have just assumed that this has happened, you may be wrong. If the OR as liquidator is the one that has authorised the transfer you have more of a problem.