CFM33192 - Loan relationships the matters and computational rules: amounts not brought into account: debt releases: corporate rescue exemption: policy intention

This guidance is applicable to certain events that take place on or after 1 January 2015.

CTA09/S322(5B) and CTA09/323A

The CTA09/S322(5B) exemption is aimed at companies in significant financial distress (as is the CTA09/S323A exemption) – companies for which there is a real and foreseeable prospect that they will be unable to pay their debts.

A creditor may agree to a debt restructuring where a debtor is experiencing financial difficulties and is unable to repay the interest and/or principal on a debt. In the case of lending between third parties at arm’s length, a creditor will normally only agree to such a restructuring as a last resort, where there is a genuine prospect of non-payment. Accordingly, a release in such circumstances will normally be sufficient evidence that the debtor is in genuine financial distress.

In many cases, the creditor and debtor will enter into a debt-for-equity swap under which the creditor will take an equity interest in the debtor in exchange for the release of the debt. CTA09/S322(4) exempts the credit that appears in the debtor’s accounts and which would otherwise be taxable as a loan relationship credit. CFM33200+ explains the exemption for debt-for-equity swaps.

Where a company is already in insolvency a credit on a release will be exempt where one of the insolvency conditions applies – see CFM33190. However, insolvency practitioners often work with creditors and debtors to achieve a consensual restructuring of debt to prevent actual insolvency. CTA09/S322(5B) may provide an exemption in such cases (as does S323A where the debt is modified or replaced rather than released).

In such cases, a lender may be unable or unwilling, for regulatory or commercial reasons, to take equity in the debtor company and take advantage of the exemption in CTA09/S322(4). The exemption in CTA09/S322(5B) is targeted differently to that in S322(4); the former is aimed broadly at cases of corporate distress, and the latter specifically at debt-for-equity swaps. Although the conditions in S322(4) and S322(5B) are not the same, it is possible that a credit on release may qualify for exemption under both provisions. In such a case, the effect will be the same.

A creditor and a debtor may agree a package of measures under which debt is restructured. In these cases, the exemption for a credit arising under the arrangements may fall partly under CTA09/S322(5B) and partly under CTA09/S323A (CFM33196).

Arrangements

The trigger for the exemption in CTA09/S322(5B) is that it is reasonable to assume that without the release and the arrangements of which it forms part, there would be a material risk that the company would be unable to meet its debts at some time in the next 12 months. The term ‘arrangements’ is not defined and takes its common meaning. Its use here recognises that the release of a debt is often part of a wider set of negotiations and actions aimed at ensuring the company is able to continue operating. It is not necessary to consider the impact of the release in isolation on the company’s survival.