Bought a business but later found out there were unpaid bills

[Lui]

A friend of mine, who never had a business before, bought a business from a friend of a friend.

It's a rental arbitrage business where he sublets properties, that part is fine but there's £50k of unpaid electricity/water/internet bills. My friend didn't look at any bank statements and there was no purchase agreement/contract so all of this came as a surprise. The previous director also failed to safeguard the tenants' deposits and withdrew the money.

What can he do as he is now being chased to pay for all the outstanding debts?

 

[fisicx]

Nothing at all. Your friend is liable for the debts.

You could take legal action against the previous owner but the chances of getting the money back is close to zero.

Your friend was very foolish in not getting legal advice prior to purchase.

 

[Mark T Jones]

A friend of mine, who never had a business before, bought a business from a friend of a friend.

It's a rental arbitrage business where he sublets properties, that part is fine but there's £50k of unpaid electricity/water/internet bills. My friend didn't look at any bank statements and there was no purchase agreement/contract so all of this came as a surprise. The previous director also failed to safeguard the tenants' deposits and withdrew the money.

What can he do as he is now being chased to pay for all the outstanding debts?

Your friend has made the rookie error of not seeking professional advice before buying the business.

Hopefully they will have learned enough to pay for it now

 

[pentel]

Sole trader or Ltd company? If it is a limited company ( which seems likely as the OP mentions director) and they bought the shares in (as opposed to the assets), the limited company owes the debts, not your friend personally. If this is the case it will be worth talking to an insolvency practitioner to check if the company is insolvent.

If it is a sole trader the debts may still be with the seller, it will depend on the terms of the sale.

 

[Lui]

Nothing at all. Your friend is liable for the debts.

You could take legal action against the previous owner but the chances of getting the money back is close to zero.

Your friend was very foolish in not getting legal advice prior to purchase.

Can he not declare bankruptcy and set up a new company?

 

[Lui]

Sole trader or Ltd company? If it is a limited company ( which seems likely as the OP mentions director) and they bought the shares in (as opposed to the assets), the limited company owes the debts, not your friend personally. If this is the case it will be worth talking to an insolvency practitioner to check if the company is insolvent.

If it is a sole trader the debts may still be with the seller, it will depend on the terms of the sale.

Limited company.

He was thinking to close it down and get landlords sign a new rental contract with the new company.

 

[fisicx]

Can he not declare bankruptcy and set up a new company?

If declared bankrupt he cannot be a director unless given permission by the court.

 

[fisicx]

He was thinking to close it down and get landlords sign a new rental contract with the new company.

The landlords won’t go anywhere near the new company. Your friend is stuffed.

And the tenants may go after him personally to recover their deposits.

 

[Mark T Jones]

Limited company.

He was thinking to close it down and get landlords sign a new rental contract with the new company.

He should take professional legal advice, not opinions from people on forums

 

[Lui]

The landlords won’t go anywhere near the new company. Your friend is stuffed.

And the tenants may go after him personally to recover their deposits.

The landlords have always been paid on time, it’s just the utility bills that haven’t been paid on time.

He has the money for the deposits that’s not an issue it’s just the previous director didn’t do his duty.

 

[Lui]

He should take professional legal advice, not opinions from people on forums

Yes well I thought it may be useful to get some advice here too since its a business forum.

 

[fisicx]

Yes well I thought it may be useful to get some advice here too since its a business forum.

Indeed it is. And the advice is to get a lawyer. Your friend is in all sorts of trouble. They may not even be able to close the company if the landlords/tenants take legal action.

And the utility companies will certainly object to the company closure.

Expect a legal bill of many thousands to sort this out.

 

[eteb3]

It's conceivable he may be able to go after the former shareholder for misrepresentation, depending on what the terms of the sale were. If it was just "mate, want my shares?", "ok, here's £n,000" then making that stick will be very difficult.

(And we're right to infer that he bought the shares? Not a transfer of business to a new company?)

In any case, the advice to get a lawyer really can't be improved on. Just repeated.

 

[fisicx]

Tell your friend to read this:

Being a company director

Understanding your role as director of a limited company and your responsibilities to Companies House.

www.gov.uk

And this:

Company director disqualification

When you can be disqualified from being a director of a company - how the process works, investigations, what happens if you're banned

www.gov.uk

 

[Lisa Thomas]

Can he not declare bankruptcy and set up a new company

Be very careful here! Bankruptcy is an insolvency procedure for individuals. If your friend makes themselves bankrupt this will do nothing regarding the limited company's debt and may cause them all sorts of personal issues!

He needs to take insolvency advice.

I'd be happy to chat to him.

I am around for most of today but then on holiday - back on Wednesday.

 

[Lisa Thomas]

Also, when he bought the shares, did he also become a director?

The Director/s of the company that owes the debt are the ones who need to take advice and sort it.

 

[The Resolver]

You said that he failed to safeguard the tenants' deposits. and withdrew it That is a serious breach of the law (i.e. to not use one of the approved deposit schemes) You later said that you have the deposits. It is still an offence for a landlord to retain the deposits unless he has used one of the insurance backed schemes.

You said the business is run under a limited company. Did your friend take a Stock Transfer Form to cover the transfer to him of the shares? Is he shown as a Director at companieshouse.gov.uk ?

Whilst there may not have been a contract for the sale of the business presumably there may be correspondence covering what agreed.

There is simply not enough information here to advise on. Your friend is welcome to call me for a free of charge chat (I am a lawyer)

 

[Michael Loveridge]

It's difficult to believe that somebody could be so thick as to buy a limited company without even asking if it owed any money, so it's tempting not to offer any assistance at all on the basis that they fully deserve what they've got.

However, it's critically important to establish that the seller said nothing at all about the company's financial position, as if he did in any way mislead the buyer it's possible the buyer could have a claim in misrepresentation.

Assuming he doesn't then it's very unusual for the landlord to pay for the tenant's utilities, so he needs to check the tenancy agreements carefully to see if the tenants are under any duty to reimburse the company. If they are, then he may ultimately be able to pay most or all of the outstanding bills.

I'm assuming the subletting is entirely legal, i.e. that the company's own landlord has agreed to it. There's a lot of illegal sub-letting going on, and if the company doesn't have the landlord's written consent (called a licence to sublet) that's another major potential problem.

As a matter of interest, what sort of figure did he pay for the company? If it was just a nominal amount then I suppose he could effectively just walk away from it.

 

[MikeJ]

It's difficult to believe that somebody could be so thick as to buy a limited company without even asking if it owed any money, so it's tempting not to offer any assistance at all on the basis that they fully deserve what they've got.

I'd go for than that....

My friend didn't look at any bank statements and there was no purchase agreement/contract so all of this came as a surprise.

Nobody is that stupid. This just didn't happen.