CFM35580 - Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: the corporate rescue exemption from S362

CTA09/S362A

S362A applies for acquisitions of impaired debt on or after 18 November 2015.

The corporate rescue exception from S362

No deemed release arises under CTA09/S362 when the parties to impaired debt become connected in cases where the corporate rescue exception applies.

Conditions

This exception applies where:

  • Within 60 days of the creditor (‘C’) and debtor (‘D’) becoming connected, C releases D from its liability to pay an amount under the loan relationship, and
  • The corporate rescue conditions are met.

The corporate rescue conditions are:

  • That C and D become related as a result of an arm’s length transaction, and
  • Immediately before C and D became connected, it was reasonable to assume that without the release, there would be a material risk that at some time within the next 12 months, D would have been unable to pay its debts.

The legislation defines “unable to pay its debts” as being where:

  • D is unable to pay its debts as they fall due, or
  • The value of D’s assets is less than its liabilities, taking into account contingent and prospective liabilities.

S362A follows the same approach as that taken with the corporate rescue exception applying for actual debt releases (CTA09/S322(5B)). See CFM33191 onwards for detailed explanation of how the conditions should be applied.

Effect

The way in which the exception works depends on whether C releases D from the full liability under the loan relationship or part of the liability.

Where C releases D from the full liability, S362 does not apply when C and D become connected. So there is no taxable release of rights when the connection starts.

Where C releases D from part of the liability, the amount treated as released by S362 is reduced by the amount that is actually released. Note that this cannot reduce the amount of the release below nil, so C cannot create a deductible amount.

When the creditor subsequently releases the debtor from the debt, there is no tax charge on a ‘release of relevant rights’ (CFM35520). The group is therefore in the same position as if the debtor company had been released from the debt as part of a qualifying corporate rescue under CTA09/S322(5B).