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Can a director loan account be transferred?

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Hi, I havent much experience in this field so i want to know if this is even a viable option. My employer has a company about to go into liquidation but is owed 120K+ from this limited company, he is also a director of another company that is active and making money to be able to pay the current loan account balance. is there a way to transfer the Loan account between both limited companies?

Thanks

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Psycho
By Wilson Philips
31st Dec 2019 18:31

Not transferred as such but, with the agreement of all parties (notably the shareholders and directors of company 2), the debt could be novated.

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By johngroganjga
31st Dec 2019 18:38

The continuing company could assume the liability to repay the loan, but only by itself becoming an unsecured creditor in the liquidation of the defunct company.

In other words, in the books of the continuing company Dr Old company £120k Cr Director £120k.

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Replying to johngroganjga:
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By georgiag
31st Dec 2019 19:13

Okay so the new/active company will become an unsecured creditor in the liquidation and on their books it will show as a debit Old company 120K and credit Director 120K? sorry if that was clear but as this is not my Fortas I want to be really clear with this advice!

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By JDBENJAMIN
31st Dec 2019 20:03

There are important tax and legal implications over this. If you don't know what they are, you really need the whole situation reviewed by an accountant and a solicitor. This forum is no substitute for that.

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Replying to JDBENJAMIN:
By johngroganjga
31st Dec 2019 20:27

What are the tax and legal implications to which you refer?

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Replying to johngroganjga:
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By JDBENJAMIN
01st Jan 2020 11:59

They are the ones an accountant and a solicitor would describe to the OP.

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Replying to johngroganjga:
Flag of the Soviet Union
By thevaliant
02nd Jan 2020 00:13

Don't know about the tax side of matters, but if Company A owes £120k to a director, and can't pay then moving that debt and only that debt, to another company looks like preferencial treatment of one creditor to me.

Why can't ALL the creditors be moved?

Of course, I doubt a liquidator will look into this sort of thing. They rarely do.

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Replying to thevaliant:
Psycho
By Wilson Philips
02nd Jan 2020 08:44

As I’ve already noted, the director would not be receiving any preferential treatment by company 1 if the debt were to be novated. The other creditors’ position would at worst be the same and might actually be improved. If instead the director were to waive the debt would you claim that this was preferential treatment?

Liquidators look for unfair alienation of assets - this is a transfer of a liability.

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Replying to Wilson Philips:
Flag of the Soviet Union
By thevaliant
02nd Jan 2020 14:07

Ahhh, I see now.

Don't get me wrong, I'm sure its all above board(!) and legal but its like a lot of things that are legally okay but morally suspect.

Maybe I spend too long looking through the obvious b*llocks that happens in situtions like this.

On 31st December 2019, Company A owes:
£120k to a director
£10k to Creditor A
£30k to Creditor B
and so on and so forth. It's not in a position to pay any of them and is headed for liquidation or Spongebob plan.

One year later, Creditors A to Z have got nothing as Company A has gone bust. The director has got his £120k back however, as Company B has paid him instead. Company B didn't bother paying the other creditors owed.

That looks like preferential creditor treatment to me.

I know, I know. I'm labouring the point. This is one of those situations where what is about to happen is quite clearly legally okay.... but morally I know exactly what's going to happen, so does everyone else here, but we all smile, wink, and say its okay.

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Replying to thevaliant:
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By Tax Dragon
02nd Jan 2020 14:17

Director hasn't "got his £120k back". He's been paid £120k by company B.

Any perquisite whatsoever, anyone?

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Replying to thevaliant:
Psycho
By Wilson Philips
02nd Jan 2020 16:42

Company B has no responsibility, moral or otherwise, to the creditors of company A. Let’s say that instead of company B the director’s grandmother had agreed to settle the debt on behalf of company A. Do you think that the creditors/liquidator of company A should be pursuing grandma for their share?

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By whitevanman
31st Dec 2019 20:13

I know I shouldn't but, I assume what the question means is that director is owed £120k by company 1 which, to all intents and purposes, is insolvent and therefore unable to repay the debt. What the OP is seeking to do is pass that, bad, debt onto company 2 which has nothing to do with the arrangements other than it has money. The debt could indeed be novated but why would company 2 choose to do that? What is the reason for it to pay that sum for, presumably, no return?
Also, would the arrangements not, potentially, give rise to a S459 charge as company 1 would owe a debt to company 2 and the credit to the director can be directly linked to it?
All things are possible but I rather suspect you need to consider the implications.

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Replying to whitevanman:
By johngroganjga
31st Dec 2019 20:34

Section 459 is about loans to participators, not loans from them.

But you are right that the continuing company reducing its net assets by £120k is something it should only do advisedly and with the interests of any creditors in mind.

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Replying to johngroganjga:
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By whitevanman
31st Dec 2019 22:16

It is actually about loans not directly to participators. The loan here is from company 2 to company 1. It, potentially, comes within s459 because it is directly connected with a payment to a participator (being the credit to his DLA which he would hope to draw down to recover his £120k).

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Replying to whitevanman:
Psycho
By Wilson Philips
31st Dec 2019 22:57

On this occasion I don’t believe that 459 would be in point, for a number of reasons.

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Replying to whitevanman:
By johngroganjga
31st Dec 2019 23:11

The credit to the DLA is not a payment to the participator. It is the accounting recognition of an obligation to repay him what he lent to the first company. A payment to him would be a debit to the DLA.

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Replying to johngroganjga:
Psycho
By Wilson Philips
31st Dec 2019 23:24

Similarly, company 2 would not be lending to company 1. Company 1 may or may not be due something to company 2, depending on the consideration given in exchange for the debt, but that would not be a loan.

Further, 459 applies if the person making the payment is not the creditor company. So even if the inter company debt were a loan the person making the payment to the participator and the creditor company would be one and the same.

And then of course there is John’s point, with which I agree - there would in fact be no payment to a participator within 459.

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Replying to Wilson Philips:
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By whitevanman
31st Dec 2019 23:58

Firstly, we do not know the facts. You refer for example, to what may or may not be due between the companies but we have no information or evidence of such. If company 1 is able to repay the DLA, I suspect the question would not have been posted. I would gamble on it being insolvent and unlikely to be able to provide anything of equal value, to either company 2 or the director/ shareholder.
Novation would mean that the debt between co 1 and the director is extinguished and a new debt between co 2 and the director is created. We dont know why co 2 would agree to that but it might be argued that in doing so, co 2 has made a distribution.
If the arrangements do not amount to a novation, the money could go round in a circle so that the DLA balance ended up in company 2 but that means co 2 has loaned money to co 1 which has then repaid the DLA balance (s459 applies). The director has then loaned the money back to co 2 and has a credit balance on his DLA with that co. But that still leaves the s459 charge.
Again, it all depends on the facts but I cannot see how the aim can be achieved without some significant, potential, tax consequences.
Of course I may be wrong but without the facts we cannot say. The purpose of my post was to highlight potential problems that appeared to be overlooked.
As ever, these issues need careful consideration.
A minute or two early but a very happy New Year to all (how sad that I'm doing this)!!

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Replying to whitevanman:
Psycho
By Wilson Philips
01st Jan 2020 07:05

I agree that certain arrangements might fall foul of 459, which is why I suggested the solution of novation.

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By lesley.barnes
01st Jan 2020 00:48

You've said that the loan from Company 2 would be to pay the director's loan back from Company 1 which is insolvent and about to go into liquidation. We've not been given enough information but if there are more creditors than the director HMRC etc the director couldn't be given preference over other creditors assuming they are all rank equally. The £120k would be apportioned between creditors and the liquidators. He may be throwing good money after bad if he starts moving debt around. The director needs to speak to his accountant or insolvency practitioner before doing anything.

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Replying to lesley.barnes:
Psycho
By Wilson Philips
01st Jan 2020 07:02

Who said that company 2 would be making a loan to anyone? The creditors of company 1 should be quite happy that a third party has taken over one of the liabilities. The creditors of company 2 may not be so happy, but if that company is solvent there shouldn’t be a problem.

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Replying to Wilson Philips:
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By lesley.barnes
01st Jan 2020 09:58

I wouldn't be happy if I was a creditor of an insolvent company and the only person who walked away with anything was the director.

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Replying to lesley.barnes:
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By whitevanman
01st Jan 2020 10:59

The suggestion of a loan between the companies was, in effect, mine. What I was trying to get at was the "how" of all this.
The loan could be novated but there would be consequences.
I don't believe it could be assigned because it would be the debtor (co 1) seeking to do that. The only other way I could think of is the "loan going round a circle" that I discussed.
As I say, I cannot think of another way, certainly not on the few facts we have.
The answer to the OP is that anything is possible if you are prepared to suffer the consequences and amongst those must be the consequences for any other creditors of the liquidated company.

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Replying to whitevanman:
Psycho
By Wilson Philips
01st Jan 2020 11:29

Why should the creditors of the insolvent company be at all bothered by a novation of the loan? At worst, one non-preferred liability has been exchanged with another. So the creditors are in exactly the same position. At best, the new debt is forgiven, potentially leaving more cash to distribute to creditors. Happy days.

The fact that a third party (it could just as easily be a relative of the director) is prepared to accept a potential financial loss in taking on the liability is of no concern to creditors of company 1. Or do you think that company 2 is under an obligation, moral or otherwise, to settle all debts of company 1?

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Replying to Wilson Philips:
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By whitevanman
01st Jan 2020 12:00

I don't think they would be concerned by a novation. I think the comments were made (certainly mine were) in the context of the circular loan scenario.

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Replying to lesley.barnes:
Psycho
By Wilson Philips
01st Jan 2020 11:29

See my response to WVM above.

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By Tax Dragon
02nd Jan 2020 07:39

Any perquisite whatsoever, anyone?

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By Justin Bryant
02nd Jan 2020 15:33

It depends what the solvent company pays for this obvious bad debt. If it pays anywhere near £120k (or even £1k assuming it's in insolvent liquidation) then that's clearly (if nothing else) a distribution by the solvent company (to the extent it's paying > MV) and taxable as such.

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Replying to Justin Bryant:
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By Tax Dragon
02nd Jan 2020 15:37

We're told matey boy is a director. We're not told he's a shareholder.

If he is, I'm four-square with you. If he's not: any perq… (oh, getting bored of typing it now).

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Replying to Tax Dragon:
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By Justin Bryant
02nd Jan 2020 15:42

The distribution needn't be taxable on him, so your point is a bad one (as usual).

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Replying to Justin Bryant:
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By Tax Dragon
02nd Jan 2020 15:48

In that case you lost me at "clearly".

[CA2006 s829(1): 'distribution' means every description of distribution of a company's assets to its members.]

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Replying to Tax Dragon:
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By Justin Bryant
02nd Jan 2020 16:06

Yes, one or more members will be taxed on it (needless to say, they needn't receive the distribution directly themselves - otherwise that would be the easiest tax scheme going). Well done for getting that bit right at least.

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Replying to Justin Bryant:
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By Tax Dragon
02nd Jan 2020 16:05

Irrespective of whether the payment is a distribution, it is (IMHO) a perquisite. If it's not taxable as a distribution (and I thought Wilson was arguing that it wasn't), it is (IMHO again) still taxable.

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Replying to Tax Dragon:
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By Justin Bryant
02nd Jan 2020 16:19

Where income can constitute both employment and dividend etc. income then the dividend analysis prevails: ITEPA 2003 s716A and ITTOIA 2005 s366(3). There is some detailed analysis of the history of that priority rule in the case in the link below:

https://www.bailii.org/uk/cases/UKUT/TCC/2015/514.pdf

I may be wrong on that particular priority point (in this case at least) and I shall end there.

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Replying to Justin Bryant:
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By Tax Dragon
02nd Jan 2020 16:39

I am well aware of the priority rules.

So I think we agree(*).

Which is nice... Happy New Year everybody! :-)

(*) Except perhaps on the subject of the easiest tax scheme going. My company wants to award a particular employee a healthy bonus - £120k, say. If DragCo pays him £120k, there's quite a lot of PAYE and NIC to hand over. On enquiry, I find he has a half-spent Bic biro (other half-spent biros are available). Buy that off him for £120k and, by your logic, no PAYE and NIC. (Just a bit of divi tax for me, the 100% shareholder.)

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Replying to Justin Bryant:
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By whitevanman
02nd Jan 2020 17:26

If I were you, I would read the case you have linked to ( on second thoughts and given past performance, no I wouldn't).
The case confirms the PA Holdings decision that "substance over form" applies. If paid as remuneration for services, a sum is taxable as remuneration even if paid in the form of a dividend.

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Replying to whitevanman:
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By Tax Dragon
02nd Jan 2020 17:54

To be fair to Justin (….did I really just say that?!) what he said was "there is some detailed analysis of the history of that priority rule in the case in the link". Perhaps you should do him the service of reading his comments?

The bottom line is that company B is worse off to the tune of £120k less anything acquired in return. If it's a novation, nothing is received in return. That seems to me (and Justin) to be a distribution (to my mind, there's a condition that the director has to be a shareholder, or connected to a shareholder... Justin disagrees) and there's earnings (I think Justin - and now you - agreed that too). One way or the other, I think the director gets a tax bill.

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Replying to Tax Dragon:
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By whitevanman
02nd Jan 2020 20:04

I did read Justin's comments and what he said was, in effect, that the tax charge on a dividend would take priority. The analysis in the case was alluded to as you say. The fact remains that the case itself confirmed the PAH case and therefore contradicted Justin's main assertion.
As to dividend / distribution generally, I did say in one of my earlier posts that such was likely to apply in the case of a novation. Like you, I don't know whether the director is also a shareholder ( it seems most likely) so we cannot be too precise. My guess is that HMRC would pursue a charge as remuneration not least because there is no other obvious explanation as to why company 2 would take on the liability, but of course it is all speculation. The simple point for the OP is that nothing is straightforward and proper consideration / professional advice is essential.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
02nd Jan 2020 16:48

What is the asset that is being distributed?

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Replying to Wilson Philips:
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By Tax Dragon
02nd Jan 2020 16:52

£120k minus MV of debt acquired.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
02nd Jan 2020 17:53

I (think I) understand where you’re coming from, but:

Company B ‘acquires’ an obligation to pay someone £120k. It pays that someone the £120k to clear that debt.

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Replying to Wilson Philips:
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By Tax Dragon
02nd Jan 2020 17:56

Wilson Philips wrote:

I (think I) understand where you’re coming from, but:

Company B ‘acquires’ an obligation to pay someone £120k. It pays that someone the £120k to clear that debt.

The only reason it does so is that the someone in question is a director. (And possibly a shareholder.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
02nd Jan 2020 18:35

So?

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Replying to Wilson Philips:
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By Tax Dragon
02nd Jan 2020 19:48

So? If a company of which I am a director (and maybe a shareholder) is down by £x and it's me that receives the £x, I suspect HMRC would expect a slice of that £x, one way or the other.

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Replying to Tax Dragon:
Psycho
By Wilson Philips
02nd Jan 2020 20:35

In which case I’d put the novation agreement in front of them.

And perhaps even a copy of Counsel opinion (admittedly a very old one) obtained in respect of what would appear to be a similar set of circumstances.

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Replying to Wilson Philips:
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By Tax Dragon
02nd Jan 2020 20:44

Back in the days when the legislation actually used the word "perquisite "?

I'd like to see the Opinion tested at Tribunal. (Ideally without any reference to GAAR and all that jazz - I don't think that'd be needed.)

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Replying to Justin Bryant:
Psycho
By Wilson Philips
02nd Jan 2020 16:46

Er... why on earth would company B pay for a liability? Do you understand what‘novation’ means, Justin?

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Replying to Wilson Philips:
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By Tax Dragon
02nd Jan 2020 16:53

No debt acquired?

Change my previous answer to £120k.

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Replying to Wilson Philips:
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By Justin Bryant
02nd Jan 2020 17:11

Well done on the dumbest comment of the year (so far at least). I really am ending there.

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Replying to Justin Bryant:
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By whitevanman
02nd Jan 2020 17:47

I believe yours timed at 15.33 has that honour since you managed to change a liability into a bad debt and as usual, set the conversation on the wrong road.
Happy New Year!

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