Here’s a scenario:

A business goes pop, leaving a trail of debt.
The business bought out of administration.
The buyer agrees that it will “help out” some suppliers to prevent those that are key to the new business from going pop too.
This “help” is outside any payment from administration of Xp in the pound.
The suggestion is made that the suppliers invoice the new parent company that will then settle the debt.

Is this really ok?

I’m not any sort of eagle, but it sound reasonable up to the invoice bit, which I don’t know about. My guess is the tricky part is the tax liability, for both the new company and the supplier.

It’s a way of keeping the finance off the balance sheet as it will never be repaid. The parent will save on tax but the supplier will stand the same amount of tax which has satisfied HMRC in the past.
Most companies who have provided this lifeline have done so to ensure their own survival with no strings attached. Others have used at as a tool to leverage a better deal so ensure you can still make the supply at a profit to protect your own business.

rogerthecat: are you sure the administrator sold the company, rather than just the assets of the company?

Sounds like one for an account and a lawyer. .. double trouble

Cheers chaps.
AFAIK the company went into administration and was then bought in its entirety an hour later. Struggling to get any details, its shareholding/directors loans/etc was a real tangle. The deal has been shrouded in rumour and misinformation because the debts are wide reaching and sizeable within the industry. All very messy,

What surprises me is that paying invoices for work not carried out directly is not seen as avoidance of corporation tax by the buyer, it comes straight off their bottom line. The supplier invoices for service they have not supplied so I would have thought that would be unearned income.

Amazingly, these deals are repositioning the company from the incompetents that ran up huge debts and went pop to the good guys trying to “do the right thing”!

All the same staff, senior personnel and it seems it’s business as usual. Just a whole heap of debt written off. Fortunately we sent in the heavies to recover our debt before all this kicked off.

In and out of administration in an hour. Not sure that can happen, in administration, an administrator is appointed to look after the interests of the creditors and only the creditors. There is a hierachy of creditors, protected (usually banks), unprotected ie everyone else, then shareholders. The administrator then seeks to get the best value for creditors, I can’t see how this could be properly done in a hour, this is a process covered by legislation so can’t be shortcut.

In terms of your other question – it is not unheard of for customers to advance cash to key suppliers with cash flow issues. I would need to see the full transactions to comment on the accounting – but unkess they are completely stupid they will have all the transactions signed off by professionals as HMRC will be all over them about the administration anyway , not least because they will have lost money as an unprotected creditor. And the banks for that matter if they lost anything, and they really take no prisoners in pursueing what they are owed.

I can’t see how this could be properly done in a hour,

A pre-pack?

True, but there is still a requirement for full disclosue.

Has to be a pre pack.
NEWCO will have bought the trade and assets of the business. Liability for supplier payments will not have been acquired so NEWCO has no obligation to pay anything. Commonly some level of “hostage” payment would be necessary to maintain supply from key suppliers. In this instance looks like they are prepared to pay some suppliers in full. No problem from an accounting stand point. If a company really wanted to avoid corporation tax I don’t think they would choose this method

And a cynic would suggest that the NEWCO is probably owned by the previous owner, or a relative of the previous owner, and bought all the assets for £1.

Sounds dodgy to me ! And unethical is sadly not the same as illegal.

And unethical is sadly not the same as illegal.

+1

Happens lots. Was the largest debt to HMRC per chance? HMRC is of course all of us.