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Liquidation

mike1983mike1983 Feels At HomeLiverpoolRegistered Posts: 48
Hello everybody,

I got a new client last month and, unfortunately, they have been forced into liquidation due to rent arrears.

This is my first dealing with a liquidation whilst being out on my own.

Their landlord wants them out and is threatening to keep their stock to cover the arrears.

The problem is that when the business incorporated, they didn't change their tenancy agreement from partnership to limited company. The stock belongs to the limited company!

If the landlord did this, would the value of the stock, which has been used to pay off a 'personal' debt, be treated as a directors loan??

Does anybody know a way around this?

They have also asked whether they could sell all their remaining stock to suppliers/customers at a cheaper price. I have warned about wrongful trading and that they mustn't take anything else on. I they did sell it, would the money generated need to stay in the company?

Many thanks in advance

Comments

  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    Answers in bold:
    mike1983 wrote: »
    Hello everybody,

    I got a new client last month and, unfortunately, they have been forced into liquidation due to rent arrears.

    This is my first dealing with a liquidation whilst being out on my own.

    Their landlord wants them out and is threatening to keep their stock to cover the arrears.
    While he can do this, if they move the stock out of the rented premises, he can't touch it. If he isn't the only creditor, arguably they have a responsibility to protect it, as otherwise they are effectively making him a preferential creditor
    The problem is that when the business incorporated, they didn't change their tenancy agreement from partnership to limited company.In which case, they are probably personally liable for the lease. They need legal advice ASAP. The stock belongs to the limited company!In which case, the landlord has no right to it at all as it's the partners who owe him, not the company

    If the landlord did this, would the value of the stock, which has been used to pay off a 'personal' debt, be treated as a directors loan?? Yes, I suppose it would - which would be repayable to the company, to pay off the other debts of the company. Seriously, don't let the landlord take the stock. On second thoughts, no, it's not a directors loan as even though the lease wasn't moved to the company name, it's clearly a trading expenses and has been claimed as such in the accounts, but it would still make them a preferential creditor.

    Does anybody know a way around this?
    Don't let the landlord take the stock.

    They have also asked whether they could sell all their remaining stock to suppliers/customers at a cheaper price. I have warned about wrongful trading and that they mustn't take anything else on. Mustn't take any extra debt on. They are now under obligation to get the best return they can for the creditors, so yes, they could sell the stock to shift it and get some cash in.

    I they did sell it, would the money generated need to stay in the company?
    Yes, distributed evenly amongst the creditors.

    If the DLAs are overdrawn, then you need to be careful as these are debts that ought to be repaid to the company.

    The directors should speak to an insolvency practitioner, but they are under no obligation to use one. If they don't have the funds to pay one (circa £5000) then this may help you:

    http://www.ukbusinessforums.co.uk/forums/showpost.php?p=1799108&postcount=284

    If they want you to do any work for them, get cash up front: they are insolvent so don't let yourself become a creditor!

    Good luck :)

    Edit: You say forced into liquidation. Has the landlord initiated insolvency proceedings?
  • mike1983mike1983 Feels At Home LiverpoolRegistered Posts: 48
    Thanks Monsoon,

    They have not initiated insolvency proceedings yet. They have lost their shop (maybe tomorrow morning) and have nowhere to store the bulky stock. They believe that the only way is liquidation. The advice you have provided was more or less same advice (with exception to the preferential creditor situation) as I was going to give but was a bit hesitant and needed clarification.

    I have asked for cash upfront and they were fine with it.

    They also paid cash for a van and want to take it out the company as though it never existed!! The cash came from a bingo win. I feel as though this is fraudulent and have advised against.

    Their DLA is standing at around £10,000 owing to directors. I assume that this is to be used to pay off creditors? Or can they take it before they start insolvency proceedings?

    Many thanks in advance.
  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    They have not initiated insolvency proceedings yet.
    In which case, they should chat to an IP but follow that link I gave you, that might be easier and cheaper for them.

    They have lost their shop (maybe tomorrow morning) and have nowhere to store the bulky stock.
    Shame. In which case, they have no choice. They shouild document what has happened, and value the stock, and try and get something in writing to say that he has taken (arguably its theft if they don't agree to it but police will say its a civil matter) stock to the value of £x in lieu of rent unpaid.

    They believe that the only way is liquidation.
    Sounds like it but it doesn't have to be formal.

    The advice you have provided was more or less same advice (with exception to the preferential creditor situation) as I was going to give but was a bit hesitant and needed clarification. If they have no choice about leaving the stock then I wouldn't worry about the pref. creditor thing with regards the stock/rent. They just must be aware of it for anyone else they pay off - must pay off all creditors equally in proportion. i.e. 3 debts: A £500 B £500 C £1000. Have distributable funds of £1000. They pay A £250 B £250 and C £500.

    They also paid cash for a van and want to take it out the company as though it never existed!! The cash came from a bingo win. I feel as though this is fraudulent and have advised against.


    If they own the van not the company, because their money paid for it, then that's ok. If they gave the winnings to the company and the company bought the van, then the van is an asset that needs selling and money distributing to creditors, and in this latter case, you're right, it would be fraudulent. If it's not recognised as an asset in the books though... all depends on the facts of who owns it.

    Their DLA is standing at around £10,000 owing to directors. I assume that this is to be used to pay off creditors? Or can they take it before they start insolvency proceedings?


    If they are owed £10,000 then they are a creditor of the company along with the landlord, HMRC and suppliers. They cannot repay themselves preferentially.
    If that was a typo and they owe the company £10,000, then they should repay it (subject to salaries etc to them already having been declared - there may be some scope to reduce it with that, but do not run up a salary now with extra tax/NI payable or they could be personally liable, but if you declare a standard salary monthly and that's not in the sums yet, then you can bring it in). If they repay it, then that money should be distributed among creditors.

    Again, informal insolvency proceedinds are not necessarily a given.

    Lots and lots of info here
    http://www.ukbusinessforums.co.uk/forums/showthread.php?t=89458

    Worth reading, and I would familiarise yourself with common questions and problems before talking to your client again.

    If the company is going to be struck off, once form DS01 goes in (if that's the route you take) then CoHo won't ask for accounts etc to be filed.
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