Another connected company question re loan rship

Inter-company loan between 2 companies, one now in liquidation. Connected?

Didn't find your answer?

Company A lend circa 100k to company B.  Company B is now in liquidation.

Company A is owned 26.75% Mr Bloggs and 26.75% Mrs Bloggs.  The remaining shares are held by external investors, none of whom own more than 8%.

Company B is owned 51.5% by Mr Bloggs and the remaining shares are held by external investors, none of whom own more than 8%.

The question is what is a 'connected company' under the loan relationship rules?  Would the above be connected?  There doesn't appear to be common control by virtue of shareholdings, but in reality, there is common control by virtue of husband and wife.

I'm trying to figure out how to deal with the 100k loan to the company in liquidation will be dealt with.  There are zero prospects of it being recovered.

Impair the asset and neautral CT treatment?

Thanks for any pointers

Replies (11)

Please login or register to join the discussion.

avatar
By FactChecker
21st May 2024 20:03

The thought crosses my (cynical) mind that those 'external investors' may nevertheless be related family - the shareholdings look too neat and given the (now proven) risk of being a minority shareholder the chances are they weren't acquired on an open market.

However ... there seems to be no doubt that there is a Loan Relationship, and the question turns to whether A and B are 'connected companies' in that context?

According to CTA 2009 s 363: Two companies are ‘connected’ if one controls the other or both are controlled by the same ‘person’ - which seems unequivocal.
But ‘person’ sometimes indicates a body of persons, so *may* be read as including the plural?

So I'm none the wiser - although I lean towards thinking they are connected.

Thanks (3)
Replying to FactChecker:
avatar
By Manchester_man
21st May 2024 23:25

Yeah, I get where you might assume that, however in this case (first I’ve seen of its kind), the investors are all high net worth people from the local business community, completely unrelated.

I’m erring towards the same conclusion. This is where the advice lines come in handy, but my insurer Hiscox don’t provide anything.

Thanks

Thanks (0)
avatar
By taxdigital
23rd May 2024 08:57

For the purposes of Part 5 of CTA 2009 two companies are connected (s.348) if company A Ltd or B Ltd controls the other or if both are under common control (s.466). Since one doesn't control the other we need to look at common control. Together Mr and Mrs have controlling interest (voting rights basically) in A Ltd whist Mr has controlling interest in B Ltd. Mr A can "secure that the affairs of A Ltd are conducted in accordance his wishes" (s.472) only if he is able to get Mrs to agree to what his wishes are. Just because they are H+W doesn't mean they may agree on every thing. It's entirely possible that when it comes to protecting economic interests Mr and Mrs may always agree. But that in my view isn't enough. There should be some agreement, express or otherwise, between them for Mrs to be always in agreement with Mr for him to be in control of A Ltd. There is this singular/plural argument about 'person' under the IA 1978 which I don't think can be interpreted to treat both Mr and Mrs to be one unit for these purposes. In other words unless there is an understanding between Mr and Mrs, as suggested above, the companies are not connected, as far as I'm concerned.

Thanks (2)
Replying to taxdigital:
avatar
By FactChecker
23rd May 2024 14:02

Seems like we both got to the same fork in the road ... and I don't disagree that it hinges on the singular/plural argument about 'person' - or that no mention has been made of an "agreement, express or otherwise, between them for Mrs to be always in agreement with Mr for him to be in control of A Ltd".

My 'leaning' the other way was possibly coloured by too much reading between the lines - where the original post says:
"Company A is owned 26.75% Mr Bloggs and 26.75% Mrs Bloggs. The remaining shares are held by external investors, none of whom own more than 8%."
If everyone other than the two spouses are 'external investors', it suggested to me that Mr and Mrs are 'one unit' distinct from the others.

But I agree my inference is probably not strong enough a basis for 'connection'.

Thanks (3)
avatar
By Manchester_man
26th May 2024 23:02

Ok, I agree that on the facts it would appear that the companies are unconnected. It is at odds with reality, which is that they are completely connected, as wife generally leaves business decisions to the husband. However, for LR purposes, following the letter of the legislation, they are unconnected.

The debtor company is in liquidation. It feels wrong to claim a LR debit when the associated credit will escape tax due to the liquidation (insufficient assets).

Any reason why Company A should Not claim a LR debit? I can’t see any reason if they are technically unconnected.

Thanks

Thanks (0)
Replying to Manchester_man:
By Ruddles
26th May 2024 23:15

You need to consider whether the unallowable purpose provision is in point

As for the singular/plural argument, that is not relevant. Common control will exist only if there is something that gives H control, on his own, over both companies. Even if H and W act together to control one company, the fact that H has 51% control over the other means that they are not under control of the same person(s) by shareholdings alone.

Put another way, B is controlled by one person. For the two companies to be connected A would need to be under control of that same person. That would not be achieved merely by W agreeing to act in accordance with H’s wishes.

Thanks (1)
By williams lester accountants
27th May 2024 06:54

I would be interested to know who thought it was a good idea to make a 6 figure unsecured loan to company B. Was there a breach of fiduciary duty in doing so? As this does not appear to have been in the best interests of company A!

If i was one of the 8% investors, i don't think i would be overly impressed by this.

Or, how many of the 8% investors in A are also 8% investors in B? As if they are the same people then making up well over 40% of the shareholding plus Mr Bloggs shareholding may give connection between the two?

Thanks (1)
Replying to williams lester accountants:
avatar
By Manchester_man
29th May 2024 06:26

Yes, the minority shareholders in A are the same as in B.

The precise shareholdings are as follows.

Company A:
Mr Bloggs 26.58%
Mrs Bloggs 26.58%
Then the other unrelated shareholders hold
8%
8%
8%
4.84%
4%
4%
4%
4%
2%

Company B (the debtor company) - same shareholding except Mr Bloggs has 53.17%

Mr Bloggs 53.16%
Mrs Bloggs 0%
Then the other unrelated shareholders hold
8%
8%
8%
4.84%
4%
4%
4%
4%
2%

I think you’re right, even though the controlling individual shareholders of each company are different, collectively with Mr Blog, they own 46.84% + 26.58% = 73.42% (company A)

And
46.84% + 53.16% = 100% (company B)

So even though the majority shareholder of B isn’t the majority shareholder of A, you’re saying that collectively with Mr Bloggs they control both companies, therefore making them connected… I think you may be right?

Thanks (0)
Replying to Manchester_man:
By Ruddles
29th May 2024 09:25

Wrong. For the same reason I gave earlier.

Mr B controls Co B on his own. Mr B requires Mrs B and/or all the other shareholders to vote with him to control A. So the companies are not under common control.

Thanks (1)
avatar
By taxdigital
29th May 2024 20:10

OP appears to be convinced looking at the ‘substance’ over form that the companies are connected. So, I thought of expanding on my previous post.

The two companies, in this case, can be under common control only if the husband is in control of both the companies. B Ltd’s case is straightforward - the 47% lot of B Ltd can’t control B Ltd even if they were to team up with Mrs.

Now, chewing this s.472 further, the husband will have the POWER to secure that the affairs of A Ltd are conducted in accordance with his wishes if:

a) Voting power: the husband has more than 50% of the votes of A Ltd which he clearly doesn’t have.

OR

b) As a result of any provision in the Articles or other document governing the company.

The Articles could have provisions for a director chairing the meeting to have a casting vote. But for the husband to have that POWER, the trouble is that the Articles ought to say that the husband will always chair all the meetings to be able to exercise that casting vote! Not impossible though. Also, bear in mind that altering the Articles now will need more than 75% of the votes.

The other document governing the company could be a shareholders’ agreement with a clause in there making the husband the universal boss! Whilst a written agreement is not necessarily required, can there be an imaginary shareholders’ agreement giving the husband carte blanche in company matters? I’m not too sure.

As for HMRC’s view at CFM35120 they do say that “there could be an oral or written agreement always to vote together, or the intention could be IMPLIED by the relationship between the parties”!!!

Thanks (1)
Replying to taxdigital:
By Ruddles
29th May 2024 20:26

Agreed, although I maintain that your last paragraph is not relevant- if wife always votes with husband then A may be considered to be under the control of those two persons. But since B is controlled by husband on his own there is no common control.

As you say, there would need to be something that gave hubbie, on his own, outright control of A.

Thanks (0)