Dispensing with professional advice and buying a business on nothing more secure than a handshake is a recipe for disaster. That was certainly so in the case of an entrepreneur who found himself in a sea of trouble after purchasing the assets of a company which sold catering and kitchen equipment to restaurants.

The entrepreneur had high hopes for the future when he paid a six figure sum to acquire the business, including trading stock, equipment and other assets of the company. He set up a new company to operate the old company's former business. He sought no professional assistance and carried out only the most rudimentary due diligence checks before proceeding with the acquisition.

The owner of the company which carried on the original business took up employment as manager of the new business, to which he owed a duty of fidelity. The new company did not, however, thrive and swiftly went into liquidation. The previous owner was said to have operated the new company for his own benefit. Following its demise, he was said to have revived the liquidated company, continuing to trade as before from the same premises.

The entrepreneur launched proceedings against the previous owner on the basis that he had worked against the new company's interests and, by his actions, brought about the liquidation. Following a trial, the judge found that the previous owner had diverted payments that were due to the new company to his personal bank accounts and to the bank accounts of the old company, over which he retained control. He also used his position as manager to divert business opportunities away from the new company.

Following a further hearing, the High Court noted that the absence of due diligence made accurate quantification of the entrepreneur's claim extremely difficult. There were no financial accounts in respect of the new company, and the old company's accounts did not accurately record its turnover. The Court did the best it could in the circumstances and ordered the owner to pay the entrepreneur various sums in damages which, when aggregated, would run into six figures.  However the time and effort involved was significant and a properly run due diligence exercise and acquisition process would have identified the financial issues in advance and made the previous owner more accountable for the direct and indirect losses he caused the new company.

For help or advice on buying a company, due diligence and ensuring you are protected, please speak to Baljit Chohan b.chohan@sydneymitchell.co.uk 0808 166 8827

 

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