Who owns future sales?

 

Occasionally there are sound commercial reasons for taking the business from an existing insolvent company and moving it into a new entity (commonly referred to as “Phoenix liquidation”).   When this occurs, the most common feature surrounds completion of existing orders and can future orders be passed directly to the new company?

Directors are under statutory duties that include protecting the company assets.  However, when a company ceases to trade, due to insolvency, the obvious argument is that the company is unable to fulfil orders, both those in progress and new orders.

In general, completing existing orders through a new company without providing some value back to the old company could constitute a breach of duty.

A defence to such a breach is often the director is the business and without the director there was no business in the first instance.  In many cases this argument fails, both in company law and because the law considers title in the property (orders) rests with the company.  New orders that were secured by the company are considered likewise.

However, the court of appeal ruled in Reynolds -v- Caroline Stanbury [2021] EWHC 2506(Ch) that putting future sales opportunities through an alternative business did not amount to an unlawful removal of business.  The sales opportunities were not pre-existing corporate assets.

As with all law reports, the Reynolds case was decided based on the surrounding facts, unique to that case.  The respondent was a professional personal shopper for the seriously wealthy and was, for all intents and purposes a sole trader.  Even a key witness (a customer) believed the respondent traded as a sole trader and was completely unaware the company existed.

Whenever a company needs to cease trading, the question of existing/ongoing orders is discussed regularly, particularly when there is a potential for the business to continue under a new entity.  In every case the directors need to consider their statutory duties and before transferring orders, seek independent advice.

Should you have an insolvency-related issue then please contact a member of the team at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may access our website at www.pbcbusinessrecovery.co.uk.