I have a good question that I believe I know the answer to but just want you to clarify. Most banks now ask for a personal guarantee on overdrafts, loans etc which they will call upon if the company goes bump. I have a client that pays back a loan and some credit cards through his new business even though it was for his previous business that went bump. He says its a business expense I feel its a private expense as this does not relate to the business in question.
My feeling is that if it was a business loan in the first place, he is entitled to repay it through his new business, if when the old business went bump the assets and liabilities were transferred to the new business. The bank held a charge over his private assets, but this does not in my view mean that the loan now becomes private in nature.
In any case, he is entitled to borrow from his new business to an extent, if the bank are calling in the old debt against his private assets.
So I suppose my answer is that it depends on the nature of the way in which his old firm 'went bump'.
Would be interested to hear other points of view.
-- Edited by Robert G on Saturday 29th of May 2010 07:14:42 PM
If we are talking here about repayment of a personal guarantee for the previous business it's exactly that, personal payments.
The new company is like a newborn child, it does not inherit it's parents debts, it is a separate legal entity in it's own right.
The debts belonging to the owner should be taken to either drawings or the directors loan account (which is a bad way of doing things and if used should never exceed £5000). Note that a directors loan account is exactly what it says on the tin, a loan to the director which is to be repaid to the company by the director.
Unless the company (not the director) purchased the previous company this is the directors debt, not the companies.
If the previous company was however purchased by the current company with a debt then you really need to involve an accountant to unravel this as we may be getting into negative goodwill territory.
Also of course you need to consider whether the loan actually became repayable on termination of the previous company and whether your client is withholding information from the lenders (who admittedly should be more on the ball if that is the case).
If that is the case then would repayment of the loan bankrupt the director? Which would of course block him from being eligible to be a director which would fold the new company anyway.
Too many if's, and's and maybe's involved in this one to give a straight answer except to say that the debt almost certainly belongs to the director and is not the responsibility of the new company which is a separate legal entity in it's own right.
Sorry to probably confuse matters even further,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
but the loans of company X cannot suddenly become the debts of company Y as that breaks down the separation of legal entities.
Company Y could take out a loan to buy company X which would repay company X's loans making them then the responsibility of company Y and possibly creating a negative goodwill situation.
Of course, one problem there is that if one's personal assets are being used to guarantee the loan to company X and it is doubtful if a bank would release that charge until the loan had been repaid making the assets unavailable to guarantee the replacement loan.
A history of failure makes it less likely that banks will be rational over transferring charges on the same terms so the refinancing agreement is likely to be at non beneficial rates which may cause issues for the new company.
I would be interested to know whether the finance providers have been informed about the situation as I suspect the existing debt for a now non existent company is being paid by the new company... If that's the case it will see the director struck off in no time.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
but the loans of company X cannot suddenly become the debts of company Y as that breaks down the separation of legal entities.
Well, they can if, as you say, the new entity purchased the old.
Negative goodwill isn't necessarily complicated...it's tested and then immediately recognised as a profit in the income statement (if, of course, the negative goodwill was calculated correctly). This effectively recognises the profit of a 'bargain purchase' (IFRS 3).
However I agree that, in this case, it's most likely that the director has to pay it from his own funds if the new firm did not purchase the old, which is what I was hinting at when I said 'if when the old business went bump the assets and liabilities were transferred to the new business'.
Regarding directors borrowing from their companies, the rules have been relaxed somewhat (Companies Act 1985, as amended 2006) and directors may now borrow up to £10k with barely a question asked. It also depends on whether or not there is an existing credit balance on the directors' loan account.
I appreciate that negative goodwill isn't complicated but it is accountants rather than bookkeepers territory when we're talking about goodwill and transfers of assets.
This stream is also getting into the complicated area of phoenix companies which are the subject of much legal wrangling regarding separation of the company from its owners, or more to the point lack of it.
I'm afraid that I'm still UK GAAP at the moment so I think in terms of FRS10 / 11 when it comes to Goodwill and intangibles.
Thanks for the heads up on 10k rather than 5k. It's just the number that I've always used and to be honest I don't really like directors using loan accounts at all. I think that's just the banker in me though that likes to keep everything squeaky clean and in it's own little boxes.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Thanks for the good advice, I had a feeling I was right on this, its a personal loan & shall be classed as one. The company had no debenture charges or charges against assets, thats probably the reason why a personal guarantee was signed for himself. They are both separate legal entities. I shall check with his accountant anyway as Ive posted these repayments to the suspense account at the minute. Shall keep you updated.
