Business paying another Businesses debt legal question

[andrew1]

I spent 6 months working for a Ltd company who didn't pay me ( which is why I'm in the mess I'm in mostly!). I trade through my own Ltd Co.

my client had 2 companies, both Limited. One was in dire financial trouble, the other was paying that company's invoices.

The 1st Company was put into liquidation owing the 2nd company some £30k.

I didn't get paid for my work as a result of the 2nd company having no money at the time and they then denied they owed me anything some 6 mnths later after promising no end of things - I billed them.. I am now suing them for my invoice, they refused to pay and I wondered if anyone can point me to something in the Companies Act or Fraud Act or any other Act come to that which states that one company cannot pay another companies bills creating an insolvent situation. This was a husband and wife set-up, husband Director of 1st Company which was wound up, wife director of 2nd company. Both shadow directors of both as these all worked out of one room.

[Amethyst]

Re: Business paying another Businesses debt legal question

your invoice was to the second company as thats the company you did the work for ? The second company is still trading and solvent ?

If its that way around it sounds quite straightforward moneyclaim for payment of the invoice against second company.


I assume you are working on the premise that they will say they have no money due to the 30k debt owed by the company that went under.

[andrew1]

Re: Business paying another Businesses debt legal question

Thanks Amethyst, What I am trying to prove is that they irresponsibly/fraudulently/against laws for directors/ companies Act whatever law I can find which states that to pay another companys debt is unlawful. They used money which should have been used for their own creditors - like me for instance and numerous others I witnessed.
It's still trading and prospering now since I turned them around and saved them both corporately and personally from financial ruin - I didn't do it to get shafted. This has landed me with the repo action I have going on along with numerous other debts I am now fighting, the consequential losses have been very significant. Yes I am just about to sue them, but it's handy having a little bit of legislation to back up the arguments. I already have one, they took my £18k invoice and via their solicitors told me I did nothing for the company only befriended the husband to save his personal butt - I did that and drove to the Midlands each week for 6 months of course out of the goodness of my heart. They then neatly claimed the VAT off the invoice in their next return - Fraud Act fits that little gem nicely - I was looking for others for their reckless financial controls.

[Amethyst]

Re: Business paying another Businesses debt legal question

sounds great - are you going for consequential losses in the initial claim too ?

I'm not too great with Tax (lol still sorting mine from 2005) but if they claimed back the VAT and are saying there was no work u were just helping as a mate and u invoiced them out of what, maliciousness. Then yep fraud but doesnt help your case - although pushes them to sort it out cause I would think they'd rather pay you 18k than the tax man probably lots more if they get fully investigated over it, cause they don't exactly sound tickety boo.

Can you claim the VAT back on invoices you havent yet paid in returns ? Sorry I dont know how it works.

Okay will look tmw for the right bits and bobs and any case laws on the subject.

[andrew1]

Re: Business paying another Businesses debt legal question

Amethyst, if you are not familiar with the Companies Act and the likes I'd save your energies, it's a big book ! I have a copy of the Act on my desk and the annotated guide to Insolvency, I just need pushing in the right direction by one of those solicitors or legal buddies who studied this kind of thing at Uni or in Practice..they'd know quickly enough, you'll be fishing in the dark.. but thanks anyway..

[Amethyst]

Re: Business paying another Businesses debt legal question

lol okay point taken, you know me

Good luck - and when you find out put it up here cause I'll only end up trying to work it out anyway.

[Guest]

Re: Business paying another Businesses debt legal question

Is this still rumbling on?

There are principles of company law under which a holding company and/or its directors could (at least in theory - this is very rare in practice) be held liable along with the board of a subsidiary company – and with particular reference to the impact of the “wrongful trading” provisions of the Insolvency Act 1986. Broadly, the wrongful trading provisions are directed towards allowing an element of recourse against the directors of a company which has gone into insolvent liquidation - where the directors knew (or ought to have known) that the company had passed the point when it could reasonably expect to avoid insolvent liquidation and had nevertheless, from that point on, continued to run up debts and other liabilities, to the detriment of the creditors. In those circumstances, the court could order the parent company to make a contribution towards the company’s assets out of their own funds. Normally, any claim under the head of wrongful trading would be made against the directors of the insolvent company alone – but if the holding company and/or its directors fell within the category of a “director” or “shadow director”, then they could also be brought within the ambit of a claim of this kind.

An example could be West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, where the director of two companies - a parent and its subsidiary, authorised the subsidiary to pay £4,000 (of a total £30,000 owing) to its parent. This payment was made at a time when the subsidiary was insolvent, and as a result caused the subsidiary to enter liquidation. The liquidator sought to recover the £4,000 from the director on the basis that in authorising the payment, he had breached his duty to the creditors of the subsidiary company. This argument was upheld and the director was found to be personally liable for the £4,000.

Under the Insolvency Act 1986, personal liability can be imposed on directors and other individuals involved in the management of a company (whether or not they are registered as directors) for trading on when the company should have shut up shop.

You could try a search for "Misfeasance" (Breach of Duty) this is a term used to describe the actions of a director which constitute a breach of fiduciary or other duty to the company. A director’s primary duty in normal circumstances is to his company, for the benefit of the shareholders. However, when a company nears insolvency or becomes insolvent, and thereby risks inflicting losses on its creditors, directors are under an additional duty to have regard to the interests of those creditors.

You may argue that the subsidiary in this case is guilty of "wrongful trading" as two of the tests for this are taking credit from suppliers where there was no "reasonable prospect" of paying the creditor on time and willfully piling up debt.

[andrew1]

Re: Business paying another Businesses debt legal question

Unfortunately this was not a 'subsidiary'. Here we had two separate Ltd companies. Mr was 100 shareholder and Director in Company A

Mr was also 100% shareholder in Company B and Mrs was the only Director

Company A got into trouble with a contract which went pear shaped and Company B paid company A's liabilities to keep it afloat to the tune of £30k

This was a typical very small husband and wife set-up that had potential but no trained business brains or financial controls. I got involved trying to resolve the contract problems for Company A and was on a commission, I got paid for that work by the Supervisor of the CVA which I organised for Company A whilst we collected whatever we could for the duff contract. Company A was then put into liquidation once finalised.

However, Mr had also got into critical financial trouble personally and whilst I was resolving Company 'A' I also resolved most of his personal issues too.

When work finished on Company A I was asked to help Company B because the fall out from A was totally intertwined because both companies traded in the same name ( albeit with a slight variation) from the same office, with the same people, with the same email, telephone, and so on..and suppliers having been written to by the CVA Supervisor stopped trading with company B. Company B had no money, and no effective financial controls, they were losing business because banking problems stopped them taking credit card orders, I changed all that on a promise of being paid once certain things had lifted, I was also offered a 50% shareholding by Mr and certain payouts. That's why I waited to get paid because it was all about clearing the problems and building the business again, clearing the old debts and building relationships with suppliers again, dealing with the likes of HMRC and so on. This took 6 months and when we got to August last year and I was still getting nothing being paid Mrs - the director who had been absent for months because she needed a job to get money and had left Mr to run it, came back to a company which was back clear and fired up with suppliers supplying, credit card facilities in place, debt and personal debt cleared and she turned around to me and said " what's all this business about 50% shares" - you're not getting shares and you can sort that with Mr..she walked off....Mr turned to me (and this after I saved his house from repossession, lost him £16.500 off his MBNA credit Card debt, dealt with all his creditors, set his business back on track and spent 6 months traveling back and forth 120 miles a week to work staying away from my family to get his business back on track) said " I don't owe you anything"! - Oh and I got him off a prison sentence for whacking a copper after he was pulled up for drink driving too.

Now the legal part of this kicks in because I had written to Mr at the tail end of the Company A scenario telling him that if I was to continue working like this in the future on 'projects' rather than pure commission for collecting a debt then I would be charging him @ £50 an hour. Company B ran in tandem with A because it was running courses and income was coming in and I was working for both companies because of the considerable amount of ' mess' administratively between the 2 companies.

In view of the way they effectively dismissed my involvement by saying I only help Mr with his personal affairs I calculated my hours ( and I was generous beyond all reason ) and slapped a bill in for £16, 000 + vat

Their defence via their solicitors said I had no involvement with the company other than a couple of meetings which they paid me for (£400 in 6 months) and I had no other involvement with company B at all - (they are compulsive liars anyway) I have since obtained testimonials from suppliers as to my involvement and have plenty of evidence of it and will have little difficulty explaining my position to a court.

Mr was not the Director of Company B, his wife was, but she wasn't there, Mr therefore became shadow director he was also 100% shareholder. In September when they received my invoice it was immediately rejected by the solicitors but Mrs included it in the next VAT return to save paying out VAT man, it still has not been reversed ( I know the bookkeeper!).

That puts a broader picture to what went on. Sorry it's a bit long...

[WendyB]

Re: Business paying another Businesses debt legal question

Not sure on the company law. However i do know that it is not illegal to reclaim the input tax (VAT) on an invoice if you haven't paid it. unless the company is on the cash accounting system. the way standard accounting accounts for VAT works is that Output tax (sales) is from the tax point (date of invoice) whether you have been paid by your customer or not. The opposite side is that Input Tax (purchases) can be reclaimed whether or not the invoice has been paid. So basically if they have an invoice they are not technically in the wrong by claiming the VAT. Obviously, if they do not pay you, then after 6 months you can reclaim the VAT on your next return under Bad debt relief, however you can only do this if you write the debt off.

[andrew1]

Re: Business paying another Businesses debt legal question

Hi Wendy, it's not actually the technicalities of VAT that I'm concerned about, it's the fact that they have denied the invoice has anything to do with the business, via a solicitor and stated catagoricaly that I should never have billed them in the first place as all the work I allegedly did was for her husband personally and nothing to do with their business - then going and getting the Vat on my invoice and deducting it from their normal VAT return...that's what I am on about..some £2500....that was in November last year and they still haven't reversed it.

[WendyB]

Re: Business paying another Businesses debt legal question

yes I see your point but unless they get a credit note from you, then they don't have to reverse it. As long as they are in possession of that invoice, they can claim the VAT back. crappy i know but thats what the VAT rules allow for. I used to be a VAT inspector. You could always try ringing the VAT office and expain the situation to them, see if you can drop them in it that way, but i don't know if there's anything can be done tbh.

[andrew1]

Re: Business paying another Businesses debt legal question

That's a pity , but can you imagine me in court ( which I will be no doubt, because I am suing them) and Mrs is there swearing blind that I had nothing to do with the Company and me asking in front of the Judge why, if she is so convinced and determined to defend her position from the outset, has she put my invoice through the company and claimed the VAT back? - I don't think, even if there is as you say, a technical allowance for her to process or claim it, the Judge is going to be too impressed with her response. She is not technically minded in the same way I am and I'll split every hair, she won't and she won't pay out for solicitors or a barrister to represent her either I shouldn't think, I know the way she works...I'll work on it... but thanks for the 'input' (non vatable input that is! )

[WendyB]

Re: Business paying another Businesses debt legal question

Sounds good to me, serve them right for being dishonest gits. What goes around comes around, I always think.