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Paying another companies debt

Unrelated parties

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Unrelated UK ltds A, B & C, all are trading figures. 

A owes B. B owes C. 

A has paid B’s debt to C directly to C, and the remainder of A’s debt to B to B. Other than some fiddly journaling, is there anything wrong with this? All are on invoice VAT accounting. 

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By lionofludesch
17th Oct 2019 18:18

Not in itself.

Though, if they're truly unrelated, I'd wonder whether that was the smartest idea.

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By whitevanman
17th Oct 2019 19:47

As with so many other things it all depends on the facts.
Generally speaking, B cannot simply assign to A the debt owed to C. It would usually require an agreement between the 3 parties and that might result in the debt owed by B to C being novated and replaced by a new debt owed by A to C. That could give rise to problems.

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By johngroganjga
18th Oct 2019 12:43

I think you are over thinking. All that is needed is for A to request and receive from C an undertaking that it will accept a payment from A as a good discharge of the debt due by B.

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Replying to johngroganjga:
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By whitevanman
18th Oct 2019 14:13

Hardly a case of over thinking, simply pointing up a potential problem. See also the latest post from the OP. B has agreed A can pay C. Sounds like novation to me but again, we don't know exactly what they have agreed (or will agree after the event?).
Say A owed B £10 and B owes C £10. If A pays C £10, C may accept that as full settlement of the debt owed by B, but what has B agreed as regards the debt owed to it by A? The original promise was for A to pay B £10. Has that not now been replaced by a fresh promise under which A will pay C in return for which B will treat the debt owed by A as satisfied? Is that a novation?
The original debt has not been "paid" although it could be that B has received valuable consideration that it accepts in full settlement of the debt. That may be OK.
But, it could get more difficult if the debts don't match. If, for example B owed C £20, the payment by A is not full and final settlement of the debt, B still owes £10. As a result of the agreements, is it that B now has a different promise to C? (the problem between A and B still remains).
As I say, I don't argue that there is or is not a novation, simply that the precise agreements between the parties need to be carefully considered to minimise problems. I can understand how concerns about B may make some shortcut desirable but there is probably a better way of dealing with this.

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Replying to whitevanman:
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By Tax Dragon
18th Oct 2019 14:34

whitevanman wrote:

...there is probably a better way of dealing with this.

A pays B, B pays C?

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Replying to johngroganjga:
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By lionofludesch
18th Oct 2019 15:29

johngroganjga wrote:

I think you are over thinking. All that is needed is for A to request and receive from C an undertaking that it will accept a payment from A as a good discharge of the debt due by B.

I doubt if C cares as long as it gets paid.

I'd be more concerned about B accepting the payment by A to C as being in partial settlement of A's debt to B.

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By paul.benny
18th Oct 2019 07:38

Why have the parties done this? It sounds like B circumventing restrictions that would prevent it using the full funds received to prioritise payment to C.

If I were A, I would want some documentation (even if informal) so that B can't claim I've only part-paid them.

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By Richard Grant
18th Oct 2019 08:32

They are not unrelated, they are part of a group if what you say about ownership is correct.

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Replying to Richard Grant:
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By paulwakefield1
18th Oct 2019 08:39

"owes" not "owns"

I initially read it the same way!

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By Richard Grant
18th Oct 2019 10:31

Thanks, I stand corrected.

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RLI
By lionofludesch
18th Oct 2019 09:10

If A pays B's debt to C, B could quite legitimately demand the whole debt from A. B might dispute the debt to C. Why should B accept A's high-handed interference in its dealings with C?

If the companies are truly independent, how does A know that B owes money to C?

Which makes me think that the claim that they are unconnected is somewhat fanciful. In which case, the discussion on the legalities becomes less important.

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Replying to lionofludesch:
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By Tax Dragon
18th Oct 2019 09:39

lionofludesch wrote:

In which case, the discussion on the legalities becomes less important.

I'm glad you've clarified. I wasn't sure if the point being discussed was legal, CT, VAT or other.

I agree with you that the OP doesn't pass the smell test.

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By atleastisoundknowledgable...
18th Oct 2019 10:50

Ok ... Owner A and Owner C are friends (more ‘that guy down the pub’ than lifetimes buddies I think), there’s a question mark over the financial trustworthiness of Owner B. B has agreed that A can pay C to cover B’s debt.
My client is A and I don’t doubt that he will get it all agreed in writing from B

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By Justin Bryant
18th Oct 2019 14:51

Never mind all that. What about the appalling spelling? It should be "company's" not "companies".

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