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Incorporation of partnership with loans

How to deal with vehicle HP agreements as part of an incorporation

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A partnership client who operate a fleet of delivery vans wishes to incorporate the business, however, the stumbling block I see is that most of their fleet is financed by HP agreements with a variety of terms to run. Given that lenders are almost certain to reject a transfer of the finance to the Newco, I am struggling to formulate a plan to help them achive their objective.

I am considering maintaining the partnership as effectively a vehicle rental business, renting the vans to the Newco, until the last of the loans expires. Can contributors offer their comments on this plan, or suggest alternatives ?

 

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By johngroganjga
01st Nov 2019 14:59

Your solution seems a good temporary fix.

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Psycho
By Wilson Philips
01st Nov 2019 15:26

Unlikely, perhaps, but you will want to check that the agreements don't block the buyer from hiring out the vehicles.

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By Justin Bryant
01st Nov 2019 16:19

There is something in law called novation by conduct that usually solves this potential problem whereby if the money starts being paid by the company and the recipient does not complain all should be fine.

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Replying to Justin Bryant:
Psycho
By Wilson Philips
01st Nov 2019 16:52

A genuinely helpful comment.

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Replying to Justin Bryant:
By johngroganjga
01st Nov 2019 17:13

But it doesn’t solve the problem of not being able to put the HP liabilities, and the vehicles that go with them, on the company’s balance sheet, which is what the question is about.

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Replying to johngroganjga:
Psycho
By Wilson Philips
01st Nov 2019 18:00

Yes it does. If the contract has been novated, by conduct or otherwise, then both the asset and liability ‘belong’ to the company.

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Replying to Wilson Philips:
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By Justin Bryant
01st Nov 2019 18:21

A genuinely helpful comment.

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Replying to Wilson Philips:
By johngroganjga
01st Nov 2019 21:26

So you can evade liability by arranging for your payments to be made by an insolvent company or a person of straw, without telling the creditor? I must remember that.

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Replying to johngroganjga:
Psycho
By Wilson Philips
01st Nov 2019 21:39

That doesn’t really warrant a sensible answer. I can only suggest that you go and read up on novation by conduct, which is a well-established principle.

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Replying to Wilson Philips:
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By Tax Dragon
02nd Nov 2019 07:37

We should be careful in assuming that we can understand the law, far less be able to advise on its function.

Whilst an accountant may be able to come to a view on the accounts treatment, the use of vehicles on the public road network has legal consequences. I would suggest that the partnership and company take legal advice on the novation of the contracts. How else will they know, for example, who should be insuring what?

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Replying to Tax Dragon:
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By jcace
02nd Nov 2019 19:17

Agreed. This seems fraught with danger, particularly if the finance company is blissfully unaware of the changes.
Much better to take legal advice from lawyers than accountants

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Replying to Justin Bryant:
Hallerud at Easter
By DJKL
04th Nov 2019 12:54

In this day of electronic banking how does one actually know it is a different entity?. If I have partnership XYZ and I form XYZ Ltd and use it to pay ,the party receiving has not got a clue who is paying.

Does not the party receiving payment have to be informed/ have reasonably spotted the change of payer for such a plan to work?

I have had this sort of issue of swapped payer recently with a tenant (and I appreciate our tenant cannot under a written lease effectively do as you suggest) where the tenant had "moved" its trade to another entity to try to escape some common repairs and we continued to receive the rent so were unaware; we only became aware when we found our actual tenant was dormant at Companies House and did a bit of digging. (Position now remedied)

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By Justin Bryant
04th Nov 2019 11:07

Obviously the insurance should be checked with the broker. We are talking about the finance only here. A bit like incorporating a BTL business, where you'd obviously want the insurance in the correct name, but the loan can be novated (and the one should not affect the other).

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By The Dullard
04th Nov 2019 11:57

Yes, but the client should probably seek advice form a decent lawyer, nonetheless.

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Replying to The Dullard:
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By Tax Dragon
04th Nov 2019 17:45

Justin's opening comment was that novation by conduct "usually solves" the "potential problem". He didn't give a tailored, situation-specific Opinion. He very carefully did not say that novation by conduct could be inferred in this case from a failure by the company in question to spot that the bills were being paid from another account.

So... I'm sure he doesn't disagree with your comment. (Indeed, I note he hasn't replied, so I infer his agreement by conduct.)

Nevertheless, it is odd that he appears repeatedly to put so much faith in insurance brokers and so little faith in legal advisors. What to infer from that? Maybe he finds the one disagrees with him less than the other?

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