CFM31020 - Loan relationships: what are loan relationships: meaning of money debt

CTA09/S303

A money debt is a debt that may be settled by

• the payment of money, or
• transferring the rights to settlement of another money debt, or
• the issue or transfer of any share in any company.

CFM31030 has more on what we mean by ‘debt’.

Example: payment of money

Brint Finance Ltd lent Hasteen Ltd £10,000. On the repayment date, Hasteen negotiates with Brint to pay the debt in kind with £10,000 worth of fuel oil. This is still a money debt, even though it was finally settled in oil, rather than cash.

Example: transfer of a right

Brint Finance Ltd lent Hasteen Ltd £10,000. On the repayment date, Hasteen Ltd can’t find the cash. However a third company, Jiddaw Ltd, owes Hasteen Ltd £10,000, the balance of a cash loan of £20,000. Hasteen Ltd transfers its right to collect the £10,000 owed by Jiddaw Ltd to Brint Finance Ltd. So, even though the debt isn’t settled directly by the payment of cash, it is still a money debt because it was settled by the transfer of rights to a money debt.

Settlement

As long as it is possible for the debt to be settled in money, then it is a money debt. This is true even if

• that possibility only existed for a short time
• the lender will accept money or another form of repayment.

For example, the terms of the debt may permit

• the borrower to repay the debt by the transfer of gold of equivalent value, instead of cash, or
• the lender to require the borrower to satisfy the debt by the transfer of some other defined property.

Both debts may be settled in cash, even if they end up being settled in some other way, and are therefore money debts.

Note that, in some cases, options to settle a money debt by non-cash consideration may be accounted for under GAAP as “embedded options”. The financial instrument may then be treated under S415 and S485 as a combination of an embedded derivative and a host loan relationship. For guidance see CFM37610 and CFM50420.