Potentially strange spongebob question

[brdbrn]

Hey all,

Been lurking here for a while, but wanted some help. Been running a company profitably for last 4 years, but this year we overextended ourselves trying to build a new service line and ended up in a case of "get bought or die"

We have an agreement to purchase the assets of the business, and start a similar company as part of the group that is buying us, and to pay off:

HMRC debts - 88k
Loans with PG - 180k
BBLS - 40k

These would all disappear immediately on purchase of us. Which is great news mentally, and clears all "obvious" debts.

HOWEVER - I would then have 120k of dividends drawn this year, against a now unprofitable business.

As I own 100% of the business, would I then just convert then write off the 120k under directors loans. And no, nothing coming to me for sale of business and no personal funds to pay it back.

PS - not looking for judgement, looking for help here after most stressful period of life.

 

[Clinton]

If they're buying the assets of the business, what's left are the liabilities. You'll be holding the original company with all the liabilities on the books.

I don't understand the deal you describe. If they're willing to clear these debts, they do so by paying that money to the company (in an asset purchase) so the company can clear the debts. They don't clear any debts directly themselves.

If the money is paid into the company and you're using it to clear some debts but not others you're in very murky waters if you then try to spongebob.

Go get yourself a good lawyer!

HOWEVER - I would then have 120k of dividends drawn this year, against a now unprofitable business.

You can take dividends only out of retained profits. If you've taken out more than the retained profit, that's a director loan and you're going to have to repay it to the business to clear any remaining debts.

 

[brdbrn]

"If they're buying the assets of the business, what's left are the liabilities. You'll be holding the original company with all the liabilities on the books."

The plan is to shut down the company with all debts having been repaid through the sale of the assets.

"I don't understand the deal you describe. If they're willing to clear these debts, they do so by paying that money to the company (in an asset purchase) so the company can clear the debts. They don't clear any debts directly themselves."

Yes - sorry - it is as you describe above - and all debts, outside of director's debt to business will have been repaid, which is the crux of the issue.

"You can take dividends only out of retained profits. If you've taken out more than the retained profit, that's a director loan and you're going to have to repay it to the business to clear any remaining debts."

Would it not then be possible to write this off - via the 'deemed dividend' approach?

 

[Clinton]

Would it not then be possible to write this off - via the 'deemed dividend' approach?

No, not if you're then going to do a spongebob with some creditors losing out.

But if ALL the debts are going to be repaid then maybe I misunderstood your early reference to spongebob (the title of this thread).

 

[brdbrn]

Yes - all debts to be repaid - only thing outstanding is the Dividends / DLA - so ignore the SpongeBob reference - was only used as there is, in essence, a creditor in the company itself.

With that in mind, what approach would work?

 

[Lisa Thomas]

What do your accountants say?

 

[UK Contractor Accountant]

HOWEVER - I would then have 120k of dividends drawn this year, against a now unprofitable business.

If the £120K iillegal dividends are reclassified as loans then you can effectively redistribute as a distribution in specie via a liquidator.

This will then make it a Caputal distribution subject to the Capital Gains Tax regime.

 

[Elliot Green]

"If they're buying the assets of the business, what's left are the liabilities. You'll be holding the original company with all the liabilities on the books."

The plan is to shut down the company with all debts having been repaid through the sale of the assets.

"I don't understand the deal you describe. If they're willing to clear these debts, they do so by paying that money to the company (in an asset purchase) so the company can clear the debts. They don't clear any debts directly themselves."

Yes - sorry - it is as you describe above - and all debts, outside of director's debt to business will have been repaid, which is the crux of the issue.

"You can take dividends only out of retained profits. If you've taken out more than the retained profit, that's a director loan and you're going to have to repay it to the business to clear any remaining debts."

Would it not then be possible to write this off - via the 'deemed dividend' approach?

If (and I stress *if* because if it not clear as it is currently explained hence the disclaimer below) dividends have been drawn in anticipation of prospective future profits that did not arise, then there *could* be two potential problems:

1. The 'advance dividends' problem in First Global Media Group Limted v Larkin [2003] EWCA Civ 1765. There is a page on the Oliver Elliot website all about that sort of dividend issue called "Can you backdate a limited company dividend". It is easy to find from Google.

2. If the 'deemed dividends' have not been properly declared the company *could* have a Section 455 HMRC tax liability on the Director's Loan Account. Currently the rate is around 33.75% I think - of the overdrawn balance.

Disclaimer: this is not legal advice and should not be relied upon as such. This is provided for information purposes only.

 

[Argentum Tax]

2. If the 'deemed dividends' have not been properly declared the company *could* have a Section 455 HMRC tax liability on the Director's Loan Account. Currently the rate is around 33.75% I think - of the overdrawn balance.

I agree, Elliot. From what little we know, there is a danger, I suspect, that HMRC could pursue this line.