CFM31050 - Loan relationships: what are loan relationships: money debts arising from the issue of securities, etc?

CTA09/S303(3)

Extended meaning of a ‘transaction for the lending of money’

Not all money debts arise from the lending of money (CFM31040).To give rise to a loan relationship, a money debt must arise from a ‘transaction for the lending of money’.

However, the phrase, ‘a transaction for the lending of money’ is given an extended meaning by S303(3). A money debt is so treated if an instrument is issued by any person for the purpose of representing-

• Security for the debt, or
• The rights of a creditor in respect of the debt.

Any legal document is an ‘instrument’. However in order to be an ‘instrument’ within the narrower meaning of S303(3), it must have been issued for the ‘purpose’ described in that subsection. Thus, for instance, an invoice is not an instrument for this purpose, because its purpose is to record a sale and demand payment, not to represent or secure the creditor’s rights. Similarly if two companies contract for a supply of services, with a monthly service charge payable in arrears, the series of service charges does not become a loan relationship just because there is documentation.

The reference to an instrument issued contemplates a unilateral act, normally by the debtor. So for instance, if the bilateral sale and purchase agreement for shares or other property sets out the terms under which deferred consideration for that sale is to be paid, that is not the issue of an instrument for the purpose of representing security for the debt or rights of the creditor. As such, this would not in itself and does not turn the vendor’s right to deferred consideration into a creditor relationship of the seller or a debtor relationship of the purchaser.

But if at the time of entry into the agreement, or later, the buyer issues an instrument, either to give a legal charge over an asset of the purchaser that is released on payment of the deferred consideration or simply to record the terms of the debt arising, that will lead to the transaction being treated as a transaction for the lending of money. This would therefore result in the creation of a loan relationship in the hands of each of the two companies.

It is also possible a money debt that does not give rise to a loan relationship initially can subsequently give rise to a loan relationship if an instrument (a debt security) is subsequently issued.

Example 1

Jevsil Ltd buys development land from Kinlog plc. The purchase price is £700,000. Jevsil makes a cash payment of £200,000 and, by agreement, leaves £500,000 unpaid.

The outstanding £500,000 is a money debt but, as there has been no lending of money and, so long as a security is not issued, it is not a loan relationship.

Example 2

Jevsil Ltd buys development land from Kinlog plc. The purchase price is £700,000. Jevsil satisfies this by

• a cash payment of £200,000, and
• issuing 5,000 £100 loan notes to Kinlog plc.

There is still no ‘transaction for the lending of money’, so the money debt is not a loan relationship within the meaning of S302(1). However, Jevsil has issued an instrument (the loan note) as evidence of the debt. S303(3) brings the debt within the loan relationships definition in the hands of both Jevsil Ltd and Kinlog plc.