CFM35910 - Loan relationships: connected parties: late interest: participation: CIS based close companies and CIS limited partnerships: transitional provisions

CIS based close companies: transitional provisions (F(No2)A05/SCH8/PARA4)

If:

  • the debtor relationship arises under a contract made before 4 March 2005, and
  • the terms of the debtor relationship are not changed after that date,
  • the conditions applicable to accounting periods ending before 4 March 2005 will remain relevant, for deciding whether a person is a participator, until 31 March 2007 or until the day before the date on which the terms of the debtor relationship are changed, whichever is the sooner.

What is a change in the terms of a debtor relationship?

The transitional protection for a debtor relationship arising under a contract made before 4 March 2005 is brought to an end before 1 April 2007 if there is a variation in the contract which changes the terms of a debtor relationship (F(No2)A05/SCH8/PARA4 2005). Whether a variation in a contract constitutes a change in the terms of a debtor relationship can ultimately only be settled by analysing the facts against the background of the law of contract of the jurisdiction concerned (i.e. that governing the contract) but the following paragraphs give examples of:

  • variations in a contract which change the terms of a debtor relationship,
  • variations in a contract which do not change the terms of a debtor relationship, and
  • difficult cases where the precise facts and their implications for the contract will need to be examined closely.

Variations which change the terms of a debtor relationship

Variations which change the terms of a debtor relationship include:

  • any change to the interest rate (or, if the loan is at a floating rate of interest, the benchmark interest rate or the margin over the benchmark)
  • a change from fixed rate to floating rate loan (and vice versa)
  • a change in the repayment schedule
  • a change in the amount which may be borrowed (including converting the loan from one currency to another)
  • a change to permit a partial repayment of a loan.

There is no limit on the size of acceptable changes. The smallest change in an interest rate (for example) will bring the transitional protection to an end unless the existing contract allows for that change. A very large increase in borrowings after 4 March 2005 will be acceptable if the contract provides for that increase in borrowing.

Variations which do not change the terms of a debtor relationship

Variations which do not change the terms of a debtor relationship include:

  • any change to the amount borrowed, repaid, interest rate etc where the change is provided for in an existing contract
  • drawing down a loan in accordance with the terms of an existing contract
  • the assignment of a security (or units of a security) by an existing holder to a new holder where that does not involve any change to the terms of the loan
  • any change in the existing contractual terms which are not terms of the debtor relationship - for example terms which relate to administrative matters connected with the contract etc
  • a change in the terms of another debtor relationship between the same parties - obviously the transitional protection will cease for the debtor relationship where the terms have been changed but this does not taint other debtor relationships between the same parties where the terms have not been changed
  • the correction of errors in the loan documentation - provided the terms of the debtor relationship which were agreed between the parties have not been changed and the documentation is simply corrected to record accurately the actual contract made.

The difficult cases

Clearly whether or not there is a variation in any case, and whether or not that variation is a change in the terms of a debtor relationship depends on the facts - what has been changed - and on the law of contract under which the contract was entered into. The following list gives examples of cases where it may be particularly important to be clear about the precise facts of the case:

  • changes to intercreditor agreements etc on the ranking of the creditors in the event of default or other occurrences - some such changes may not affect the terms of a debtor relationship but other changes may do so if, for example, the effect of the change to the intercreditor agreement is to change the timing or basis of accelerated repayment if the debtor company fails to comply with loan covenants etc
  • changes to the provision of security (for example, fixed or floating charges) for loans - these may or may not have the effect of changing the terms of the debtor relationship
  • assumption of loans benefiting from transitional protection by a new debtor - the original debtor company will have no further interest in the loan and the transitional protection can apply to the new debtor relationship provided that the transfer to the new debtor happens under the terms of an existing (pre-4 March 2005) contract for that new debtor.