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Novation to pay off an insider
Hello group:I'm not entirely comfortable with this scheme that I thought up, and I need you all to tell me why I'm not.Potential debtor personally owes his ex-wife and her family $60,000; these are sums advanced over the years to keep his construction business afloat. About $20,000 of the debt is well-documented, and the rest relies on tracing checks given over the years.Potential debtor just incorporated his construction business. The brand-new corporation has a liquidation value of around $25,000: on the asset side, we have bank accounts and accounts receivable; on the liability side, we have mostly current tax liabilities that haven't yet been paid. I'm pretty clear that the assets are earned by the corporation, not fraudulently transferred to it.The ex-wife is an integral part of the construction business: she's the bookkeeper (and my primary contact for financial information about the debtor). Obviously, she strongly wants the $60,000 paid, and the debtor is willing to go along (even in conversations outside her earshot where I can tell him how little leverage she has here).gree to a novation: the corporation agrees to take on the family debt (perhaps to the tune of $40,000, not $60,000), the ex-wife agrees to discharge her ex of his debt to her family, and the debtor agrees to continue employing the ex-wife. There is a business reason for the debt: it was originally to fund the debtor's business, now transferred to the corporation, and the corporation's assumption of the debt allows the continued relationship of a key person in the business.Questions:1. Will the trustee recognize this liability as a bona fide corporate debt such that it will lower the liquidation value of the corporation?2. Assuming I get my client's informed consent, would I violate any ethics rules here? I have been very wary of not divulging client secrets to the ex, and have warned her several times that I cannot give her legal advice.Thanks in advance for your thoughts here.- John D. Faucher
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