Debt for Equity Swop Process

Debt for Equity Swop Process

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Hi all,

We have 2 small companies, Company A & Company B. Both are owned 100% by the same director. Company A owes Company B £10,000 for a loan.

As company A is currently loss making and effectively worthless, the director wants to do a debt for equity swop. Swop £10,000 in debt for a 1p ordinary share.

I am just wondering what process we need to follow. I have looked online but cannot find much.

I would think:

1) Company A should have a meeting of the board (Director who is 100% shareholder with 2nd person who is Company Secretary), and pass a resolution and then prepare the minutes. Company B has the same director (100% shareholder) and Company Secretary so I would think the minutes would be more or less the same.

2) Issue a new 1 penny share at Companies House for Company A, and issue it to Company B.

3) Complete the double entry.

Company A: Credit Share capital (1p) and credit premium Account (£9999.99), Debit Loans payable account (£10,000).

Company B: Debit Bad debts (£9999.99) and debit share holding (1p) Credit Loans receivable account (£10,000).

Are there any other steps that should be taken in order to complete the Debt for Equity swop? Have a missed anything out or should any other forms be completed?

Many Thanks for any help.

Replies (10)

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By johngroganjga
24th Feb 2014 14:36

What is the point?

Why does the director want to do this? 

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Replying to carnmores:
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By davidmjones1
25th Feb 2014 06:28

The director would like to claim tax relief

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By justsotax
24th Feb 2014 14:55

...debit bad debts...

trying to claim tax relief via P&L?

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By davidmjones1
25th Feb 2014 06:29

Have I got the steps right or can you think of anything I may have missed out? Thanks

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By johngroganjga
25th Feb 2014 10:14

What does the director (as opposed to his company) want to obtain tax relief for?

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By justsotax
25th Feb 2014 10:20

i presume you

are looking to claim income tax relief on a negligible value claim on shares held....although if this is the case it will not work (not least because this is a transaction between companies - not between shareholder and company...!?) - but also if the value of the shares being swopped are nil at the time of the debt/equity swop then you cannot get income tax relief...the value (£10,000) must be the market value of the shares at the time of the swop....(I believe...) 

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By davidmjones1
26th Feb 2014 01:05

Once the debt for equity is done, the bad debt (10k loan that was swopped for a 1p share) will be an allowable expense when calculating the corporation tax bill. (Sorry I did not make that clear).

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By johngroganjga
26th Feb 2014 07:56

And why do you think that a debt for equity swap is a necessary prelude to make the write off of the debt allowable for corporation tax? 

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By davidmjones1
03rd Mar 2014 07:17

The companies are connected, therefore a bad debt between them would not ordinarily be allowable as a deduction against CT. However it would be allowable if a debt for equity swap is done.

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By ces.hlb
05th Mar 2014 09:26

technical basis for CT deduciton is?

Please could davidmjones1 explain the technical basis for claiming a CT deduction where there is a debt/equity swap in these circumstances.

Is it necessary to issue 1p share with the rest as share premium or would 10,000 £1 shares issued at par be OK too?

Thanks

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