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Failing to do one's 'due diligence', and in particular failing to check out the bona fides and financial stability of trading partners, can prove to be a massive mistake. In a recent instance, a construction company that failed to take appropriate steps and trusted a plausible conman found itself the victim of a theft of £1.4 million.
The construction company paid the money to a second company after the latter offered to assist in raising capital for a development project. The driving force behind the company which was to raise the capital was an undischarged bankrupt. Although he was not a director, the company was under his control and he conducted all negotiations on its behalf.
Various substantial payments were made by the second company to third parties – including a company specialising in the sale of high performance cars – before the truth emerged and administrators were appointed at the construction company's behest. It transpired that the bankrupt's company was insolvent throughout the period in which the payments were made.
Proceedings were launched by the administrators to recover the payments. The High Court found that they had constituted a fraud against the capital raising company's creditors in that they were gratuitous dispositions of the company's money for purposes unconnected to its business. £335,000 paid to the car sales company and £157,000 paid to an individual in respect of the conman's gambling debts had, in effect, been simple theft.
The Court directed the car sales company and the individual to repay those sums to the insolvent company. However, in seeking to recover its money, the construction company will still have to wait in line with any other creditors that the insolvent company may have.
Had the construction company been more careful about its choice of business partners, it would not be facing the legal costs, delay and possible losses that have resulted.