Dominant influence and intercompany loans

Dominant influence and intercompany loans

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If company A has a significant intercompany loan from company B, which is effectively funding company A's activities, does that give company B the right to exercise dominant influence in accordance with CA2006, Sch 7 point 4?

If so, should company B be considered a parent company of company A as detailed in CA2006 1162(4) and therefore require consolidation? 

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By Kevin Kavanagh
05th Feb 2016 10:41

Unless the loan agreement contains provisions

Unless the loan agreement includes provisions relating to 'influence', e.g. the appointment of a director, then no. It could of course have indirect control based on its ability to insist on repayment of the loan - again depending on the terms of the loan.

As for it being a parent company: unless it owns a majority of the share capital of A, then no.

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Replying to Paul Crowley:
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By TJC2011
05th Feb 2016 12:16

Thanks. But if I am not misreading the legislation, according to CA2006 1162(4), if an undertaking has the power to exercise or does exercise dominant influence over another undertaking, it is considered a parent regardless of shareholdings.

What if there is no formal loan agreement in place?

 

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By Mike Bath
08th Feb 2016 14:48

Agree with Kevkava

It's correct that A could be regarded as the 'parent' of B for consolidation purposes even without holding any shares in B if there is dominant influence.

Dominant influence in this sense would normally look at issues like ability to appoint Directors to B's board, ability to directly influence B's policies & decisions etc.  It's very unlikely that being a major creditor would, in itself, constitute dominant influence.  

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Replying to frankfx:
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By TJC2011
08th Feb 2016 16:02

Understood.

So what if the two companies shared a number of directors/members or shareholders?

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By Duggimon
08th Feb 2016 16:51

I don't think that makes a difference as regards your question, the fact that the shareholders or directors of A have those powers does not mean that company A has those powers, they're separate legal entities. The two companies are associated companies but not a dominant influence or defacto parent.

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By WhichTyler
08th Feb 2016 18:41

Overdraft...

There are numerous banks providing overdrafts to trading companies, which are repayable on demand, and without which the company may find it very hard to operate. That doesn't mean the bank is exercising 'dominant influence' (though it may feel like it from the business's point of view...)

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