CFM33196 - Loan relationships: the matters and computational rules: amounts not brought into account: debt releases: corporate rescue exemption: modification or replacement

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

CTA09/323A

Where a debtor relationship of a company is modified or replaced on or after 1 January 2015, CTA09/S323A provides an exemption for a credit arising. In the context of corporate rescues these are sometimes referred to as ‘amend and extend’ exercises. The exemption applies where it is reasonable to assume that, but for that modification or replacement, there would be a material risk that a company would be unable to pay its debts at some point in the following 12 months.

Where a third party creditor acting at arm’s length agrees to a modification or replacement this will normally be sufficient evidence that the debtor is in genuine financial distress.

The meaning of the phrases ‘unable to pay its debts’, ‘material risk’ and ‘reasonable to assume’ for the purposes of CTA09/S323A is the same as that which applies for the exemption in CTA09/S322(5B). See CFM33193 – CFM33195.

As noted in CFM33192 above, insolvency practitioners emphasise the importance of taking early pre-emptive action to avoid future problems. Typically, a debtor will wish to implement an ‘amend and extend’ at least 15 months before the maturity of a loan so as to maintain going concern accounting treatment. The fact that the principal of the debt is due beyond the 12 month window in CTA09/S323A does not preclude the exemption applying.

The test is hypothetical and looks at whether, within 12 months of the ‘amend and extend’, it is reasonable to assume there is a genuine risk of insolvency (i.e. the company meeting the ‘unable to pay its debts’ test) had the modification or replacement not been implemented.

The ‘unable to pay its debts’ test is itself, forward looking (as explained at CFM33195 above). So the exemption does not simply require that the company is unable to pay those debts which actually fall due within the 12 month period, but rather that there can be said to be a material risk that, at sometime within the 12 month period, the company will either be unable to pay its debts when they fall due or will have insufficient assets to be able to meet all of its liabilities, taking into account prospective and contingent liabilities, as and when they eventually fall due, in either case even if these debts fall due after the 12 month period.

It should be noted that CTA09/S323A prohibits any debit being brought into account where a credit previously exempted under S323A is reversed. No such prohibition applies to CTA09/S322(4), on the basis that it is not possible to reverse a debt release.