The OldCo-NewCo Scam

Same address, same business, but your money is gone!
The OldCo-NewCo Scam.

 

A customer refuses to pay what they owe you claiming the company that owes went out of business. They say it with a straight face standing in the same location, under a sign with the same business name, using the same equipment and supplies and employing the same people.  They refer you to their lawyer, likely the same person who advised them to carry out this common “legal” scam, I mean scheme, of incorporating a new company to replace the old one without paying the debts of the old one.

 

You fume.  This can’t be legal!  They’ve just stolen my money!  They can’t get away with this!  But they do.  They’re counting on you being baffled by the legal moves they pulled and not being willing to spend the time, energy or money to find out what happened and hold them accountable.  And most of the time, they’re right.

 

What happened?  This situation often occurs where a business is an incorporated company operating under a trade name.  I’ll use a recent example we sorted out for a client of ours, a local utility company we’ll call HydroCo. 

 

HydroCo’s story

Their customer was a restaurant operating under a trade name, let’s call it “Tasty Taters.”  Tasty Taters was the registered trade name for a numbered corporation we’ll call OldCo.  OldCo had run up a number of bad debts, including $20,000 in hydro bills to our client.  One day a fellow shows up at HydroCo’s office saying OldCo has gone out of business and he would like to open up an account for a newly-incorporated numbered company we’ll call NewCo.  NewCo wants a new account for a new Tasty Taters at the same service address.  Our client opens the account for NewCo, but requires a hefty security deposit. 

Not surprisingly, OldCo fails to pay the $20,000 owing on its hydro account. 

HydroCo asked for our help.  We confirmed that OldCo and NewCo were in fact operating the same business under the same trade name at the same address.  What we didn’t know was if NewCo purchased the business from OldCo for a fair price.  It doesn’t matter. 

 

The law

Under the provisions of Ontario’s Bulk Sales Act and case law interpreting it, NewCo is responsible for paying OldCo’s creditors unless it obtains a certificate signed by 80 percent of OldCo’s creditors by dollar value agreeing to the sale.  We figured that with $20,000 owed to it, no such certificate could have been provided without HydroCo’s agreement.

 

So either NewCo bought OldCo for fair value but still had to pay OldCo’s creditors or NewCo just stepped in and pirated OldCo’s assets including good will (customers and trade name.)  Either way, NewCo owed HydroCo the $20,000.

 

Stopping the scam

After hearing the results of our investigation and our recommendations, HydroCo said “go get ’em.”  We sent a demand to NewCo and were referred to the lawyer for OldCo.  The lawyer had no explanation, just spun a fairy tale that we interpreted as, “Umm, ah, no one has ever challenged us before when we pull this scam” and promised that the director of OldCo would pay the debt.  He didn’t.  On our advice, HydroCo took the $20,000 owed by OldCo from NewCo’s deposit and delivered a notice of termination saying hydro would be cut at the location if the $20,000 wasn’t replenished in the security deposit by a certain date.  OldCo paid.

 

HydroCo was savvy enough to have taken the security deposit from NewCo so the money could be recovered without litigation.  However, if they hadn’t the law is clear that HydroCo could sue NewCo and win.  And since the business is operating and not going anywhere, the judgment would be enforceable.

 

Getting help

In my experience this NewCo-replaces-OldCo scam is common and succeeds in “legally” robbing many hardworking businesspeople of their money.  The scam is flawed in that it has no legal basis and is easily challenged and defeated.  The only barrier to recovery is the unwillingness of those fleeced to hold the scammers accountable.  Too often, it involves hiring a lawyer and paying by the hour to fight the scam.  The police won’t do anything about it because “it’s a civil matter.”  Unfortunately, the victims often end up feeling victimized twice because the legal bills exceed their willingness to pay them and they give up faced with certain high legal bills and uncertain success in recovering their unpaid debt.

 

A new breed of lawyer is coming to the rescue though.  The legislation governing lawyers in Ontario was amended in 2002 allowing lawyers to charge a contingency fee instead of only by the hour.  Contingency fees are offered most commonly by personal injury lawyers, but the practise is expanding to general civil litigation as well, particularly to collection matters like this.  If you’re in this situation, look for a lawyer who will put her money where her mouth is; one who will back up saying your case has a great chance for a full recovery by offering to recover your money for a percentage of what she gets back for you. 

 

 

About the Author

Todd Christensen is the principal of Christensen Law Firm in Cambridge, Ontario. His firm restricts its practice to unsecured debt collection and has been a leading innovator in mass litigation for large credit granters and providing access to justice for small credit granters.