Separate company to protect stock

mike1983

Hello everybody,

A client has asked me to find out whether he can set up a separate limited company which buys in their stock and sells it to his trading company at cost as and when required.

The reason for this is that he feels things are not going too well at the moment and he wishes to protect his stock in the event of his company going bump.

I feel this is an acceptable way of protecting his stock, but will the liquidators see it that way???

The 'holding' company will be registered in the same address as the current limited company and the stock will also be kept there.

I have tried to look up this and can't seem to find anything.

Can anybody advise as to whether there are any legal issues I need to be aware of?

Many thanks in advance

Kind Regards

Mike

Monsoon

It would have to be disclosed as a related party transaction but I can't see anything glaringly obvious that would cause a problem.

The director would have to show, in the event of cashflow difficulties/insolvency, that he wasn't making the stock company a preferential creditor over the others (and indeed if he doesn't pay his stock supplier for the goods they would hold the title to them anyway). So depending on who the other creditors would be, I don't know how useful his other company would be.

I don't know whether the stock company would get credit on purchases as it will be new and have no profit - don't know if that is a factor that needs considering.

mike1983

Thanks Monsoon,

They don't have any credit limits, they just buy as and when they receive orders.

The stock they need protecting is display fireplaces which do get sold on eventually.

They say in the event of insolvency, they would need that display stock to start up again.

Hopefully it never comes to that!