Ltd company RLE on other Ltd company (round in circles!) are these people up to something dodgy?

[ShootfortheMoon]

Hi All,

This is my first post so forgive me if it's long winded.

I am about to go into business with someone (Co-Directors of a Ltd company) so before setting up our new venture I've done a bit of digging with Companies House just to check their history as a Director.
What I've found is quite confusing to me, so I'm hoping someone more knowledgable can shed some light.

This is the scenario I've discovered (for the purposes of anonymity I'll use the false names Clare and Bob!)

Clare and Bob set up company A. This went into administration/insolvency (debts still outstanding of approx £2.1m)

Bob has also set up companies B,C,D,E, F, G etc (10 in total) while company A was trading and after (these 10 companies have very similar names - 1 word different in each).
Recently Bob has "resigned" as Director of all companies except 1 and named each company, as the PSC/RLE for each other company.
So Companies C & D are now the Directors/PSC of company B.
Company B is the director/PSC of company C
Company C is the director/PSC of company D
and so on.

None of these companies seem to be actively trading from the accounts submitted (Accounts for Dormant company on each filing report).

So I'm wondering - what are the benefits (if any) to registering multiple Ltd companies, keeping them dormant on companies house, but then making each of them the PSC on the other?

It may all be completely above board, but something seems unusual to me about it, as looking at Bob and Clares records on companies house I'd imagine they should be bankrupt given the Insolvency, huge amount due to creditors from company A (around £2.1m) but they are outwardly very wealthy (large house, expensive cars, private education for children) so what am I missing?

Any thoughts, insight appreciated

 

[Mr D]

Insolvency is for the company. Bankruptcy is for personal - and the two may well not happen together.
The company debts belong to the company, not the person. No reason to go bankrupt unless owing lots of money personally.

They can indeed be outwardly very wealthy. Their wealth does not matter to the company unless there is wrongdoing, overdrawn directors loan account or personal guarantees.

I'd be wary of entering in business with someone who has so spectacularly crashed a company. Will they crash the one you want in on? Possibly. Or maybe they learnt from it.

You presumably would not be in control of the company, they would.

 

[ShootfortheMoon]

Thank you for your response.

I have a small Ltd company already which has ticked over nicely for 6 years, this mutual venture would be 50% - 50% between 'Clare' and I and is in a different industry to the one they have experience in, so we'd be running it together - but yes, I agree - they HAVE spectacularly failed in business in the past - which is why Im confused as to how financially comfortable they are! I don't understand how they can continue to set up companies, gain finance etc with such huge liabilities still owed by a company they were responsible for.

 

[ShootfortheMoon]

Or is it a case of money breeds money? Once you have some in the pot you can create more companies and generate more finance?

 

[Mr D]

Thank you for your response.

I have a small Ltd company already which has ticked over nicely for 6 years, this mutual venture would be 50% - 50% between 'Clare' and I and is in a different industry to the one they have experience in, so we'd be running it together - but yes, I agree - they HAVE spectacularly failed in business in the past - which is why Im confused as to how financially comfortable they are! I don't understand how they can continue to set up companies, gain finance etc with such huge liabilities still owed by a company they were responsible for.

The business and them are separate.
Crash a company with just company debts owed and its possible neither of them is liable for a penny. They'd not lose the company liability shield easily though it can be removed.



Gaining finance is down to ability to borrow. What you won't see is what assets are used - could be the house great aunt dora left for them at other side of the country they don't want.

 

[Mr D]

Or is it a case of money breeds money? Once you have some in the pot you can create more companies and generate more finance?

You could create dozens of companies. You may be a fool to do it or a genius but there can be reasons to separate parts of a business from each other. One for each building owned for example, separating asset owner from business using building....

Finance can be them putting a major sum down for deposit, business getting finance then over time them withdrawing their money from the business... so if it goes under they don't lose out.
Or if it goes under too soon they do lose out.

The shareholders can lose considerably when a business goes under.

 

[ShootfortheMoon]

I see!
So if they used great aunt doras house as a fixed asset/security to gain finance (before presumably liquidating the business) the loss of the house during insolvency wouldn't matter? (obviously this is all hypothetical but I'm trying to understand what makes people do this sort of thing as it seems it's going on!)

 

[Mr D]

I see!
So if they used great aunt doras house as a fixed asset/security to gain finance (before presumably liquidating the business) the loss of the house during insolvency wouldn't matter? (obviously this is all hypothetical but I'm trying to understand what makes people do this sort of thing as it seems it's going on!)

Its been ongoing quite some time. Unless personal guarantee or breaching liability shield of the company they personally won't owe anything. An asset helping them get finance then over time taking sufficient out of the company to cover value of asset would mean they don't lose out.
Of could be they do lose out - but you don't see it as they don't think of it in terms of cash.

Lending to business goes on quite a bit too. Suppliers lend money on a 30 day or whatever terms deal, often without other assets to back up the debt.
When a business goes under it appears from the figures people post that HMRC are often owed quite a bit. They aren't always the biggest creditor but usually far from smallest.

Once insolvency is done the decisions of the directors are investigated. Judging by the experience of some of the forum users the chances of being banned as a director are slim unless say finance director of Patisserie Valerie...

 

[ShootfortheMoon]

Interesting. Well I think it safe to say that unless I also want to begin ducking and diving for a living, I should steer clear of these people!

I can't say I'm surprised that a lot of this goes on - it seems HMRC are either too understaffed or simply don't have the powers (or both!) to prevent this sort of thing happening.

 

[Mr D]

Interesting. Well I think it safe to say that unless I also want to begin ducking and diving for a living, I should steer clear of these people!

I can't say I'm surprised that a lot of this goes on - it seems HMRC are either too understaffed or simply don't have the powers (or both!) to prevent this sort of thing happening.

I don't think its anything to do with HMRC. More those lending money.

 

[ShootfortheMoon]

Yes I dare say you're right. At some point way back in time I'm guessing they must have started out with a lump sum of their own, in order to start the ball rolling...I don't know how they can sleep at night- I think I'd be looking over my shoulder constantly but as you say, if you understand how to play this game, and keep your personal assets safe then I suppose it's lucrative!

 

[Mr D]

Yes I dare say you're right. At some point way back in time I'm guessing they must have started out with a lump sum of their own, in order to start the ball rolling...I don't know how they can sleep at night- I think I'd be looking over my shoulder constantly but as you say, if you understand how to play this game, and keep your personal assets safe then I suppose it's lucrative!

A few of us have crashed companies. And now run companies.

 

[fisicx]

I don't know how they can sleep at night- I think I'd be looking over my shoulder constantly but as you say, if you understand how to play this game, and keep your personal assets safe then I suppose it's lucrative!

Look at Philip Green - about as unscrupulous as they get, shafted everyone but still walks away with a fortune and a knighthood.

 

[ShootfortheMoon]

True!
And what is the benefit of having one of your other Ltd companies named as Director on another Ltd company? Surely the chain leads back to you anyway - what am I missing?

 

[Mr D]

Look at Philip Green - about as unscrupulous as they get, shafted everyone but still walks away with a fortune and a knighthood.

Yes, strange how he was chased for money rather than the other pension trustees.
Wonder what the shareholder had to say about his handling of the company...

 

[Lisa Thomas]

Have a read of the Administrators & report/s to creditors to see if there is any mention of debts being owed by the Directors to the Company or claims they might be pursuing against them

 

[Clinton]

If you're looking to go into business with someone then the first thing you need to do is engage the appropriate legal advice, not come to UKBF.

Your lawyer will be able to answer all your questions many of which seem to display a great deal of confusion between company insolvency and personal bankruptcy, the limited liability nature of companies, what the PSC register is about and how it is used / manipulated, the occasional (legally valid and sound) reasons for SPVs (Special Purpose Vehicles), sound reasons for holding dormant companies, what HMRC are and aren't concerned with ... etc. etc.

"Clare's" history as a director is just one tiny part of the equation and, frankly, one that you're relying on too heavily, and possibly getting misled, because you have no clue on how to conduct due diligence on a potential investor.

Go pay the money and get a good lawyer instead of trying to do this on the cheap!

 

[ShootfortheMoon]

Thanks for all the responses folks - appreciate it!

 

[The Resolver]

First step is to ask them in writing (email) for an explanation of this history and insist on their reply being in writing. If relations/business turns out bad in the future and it becomes clear that their response to your question was not 100% truthful , then at least you may have some comeback.

Secondly, it is absolutely vital that you both enter into a Shareholders Agreement . As 50/50 shareholders you run a huge risk of a stalemate damaging the business. A well worded and detailed SA will mostly avoid this and , importantly, give each of you fair and clear exit frameworks that can be triggered backed up with an agreed process for an independent share valuation. See my page here.