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Can you tfr a DLA between connected companies?

Transfer of credit DLA between connected companies

Hi,

I have a client who is director of two companies: one is 'active' and the other has more or less ceased to trade, but he is owed c.£100k from the DLA. Given that the £100k DLA will not be repaid to him as the company has ceased to trade, is it possible to transfer the DLA credit to the other trading company for him to draw down against?

The two companies are connected but not technically a group, although a group can obviously be formed if needed. I've been looking at s171, TCGA1992 but it only seems to mention transfer of assets between groups and not liabilities, nevermind an obviously connected DLA.

Anyone have any experience on this or can shed any light? Thanks

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By DJKL
16th Oct 2017 16:38

Given what you say, what is the current market value of the loan he made to company dormant that he in effect now wants to sell to company active? Might it be nil?

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By RichJ
to DJKL
16th Oct 2017 16:46

Well the DLA is £100k per the accounts as this is what he owed from the business, so I presume the MV must also be £100k? There is no real prospect of the (now dormant) company paying him this back so he wants to transfer the DLA credit to his other trading business where he will be able to repay himself and effectively save dividend tax @ 32.5%. The question is, is there anti-avoidance blocking this?

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By DJKL
to RichJ
16th Oct 2017 16:53

But the wonderful asset, the loan owed by company dormant is surely worth hee haw, a debt with no chance of being repaid is worth what?

If company active pays him £100k for an asset worth nought what happens next?

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to RichJ
16th Oct 2017 17:12

The danger is that, as a rule, creditors rank above directors' loan accounts in a winding up.

And, unless I'm missing some clever subrogation manoeuvre here, what you're effectively proposing is that trading company loans £100k to dormant company so that dormant company can pay off the director in preference to a creditor (ie trading company). See the danger?

Afterthought: I've seen this done (by the other side in a legal case) but with lesser amounts. To complete the circle, the director had reinvested the cash he received into his trading company. The dormant company was left to run on for ever and a day. Almost 10 years on, and it's still with the liquidators pending consideration of further action (not because of that particular manoeuvre; because of a multi million pound hole).

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By DJKL
to I'msorryIhaven'taclue
16th Oct 2017 17:10

I'msorryIhaven'taclue wrote:

The danger is that, as a rule, creditors rank above directors' loan accounts in a winding up.

Do they, why? Unless some form of security/statutory entitlement I would have though them pari passu.

I will say in mitigation that I have not really looked at insolvency law since circa 1985, but I am sure I recall more recently getting paid pennies in the pound re a former tenant and a loan from the director of that company to that company ranked the same.

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to DJKL
16th Oct 2017 17:25

https://www.gov.uk/closing-a-limited-company

QUOTE: "When your company is insolvent, the interests of the people your company owes money to (its creditors) legally come before those of the directors or shareholders." UNQUOTE

I too remember the good old days, DJKL: when the DLA was the first (and often the only) thing to get paid; and when yours truly was the only student in the class with a Golf GTI. Altogether now: "It was a very good year..."

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to I'msorryIhaven'taclue
17th Oct 2017 08:07

[quote=I'msorryIhaven'taclue]

QUOTE: "When your company is insolvent, the interests of the people your company owes money to (its creditors) legally come before those of the directors or shareholders." UNQUOTE

Are we sure that that means that, in law, directors AS CREDITORS rank behind other creditors because they are directors?

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By DJKL
to johngroganjga
17th Oct 2017 09:15

John

I had a look for this last night, but could not get that far, I found a few websites where it was indicated that connected unsecured creditors ranked below unsecured creditors but could not track down the actual legislation.

It had come as a bit of a shock to me, then again not sure why I should expect nothing to change in last thirty years.

Here as an example is a bit from Begbies Traynor

https://www.begbies-traynorgroup.com/articles/insolvency/who-gets-paid-f...

Liquidator fees and expenses
Secured creditors with a fixed charge
Preferential creditors
Secured creditors with a floating charge
Unsecured creditors
Connected unsecured creditors
Shareholders

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to DJKL
17th Oct 2017 11:21

@John & @DJKL

I believe this (duty towards creditors) sprang from the Companies Act 2006, which introduced certain statutory requirements relating to Directors' duties (which had previously evolved through common law); some of which relate to creditors.

For an outline summary: https://www.slaughterandmay.com/media/251437/an-introduction-to-english-...

QUOTE Section 2.1. General Duties of Directors
One of the key duties is to promote the success of the company for the benefit of its members as a whole. However, if the company is approaching insolvency the directors are then also required to consider or act in the interests of the company's creditors. UNQUOTE

Sticking with the above, Section 2 & (nore appropriately) Section 3 "Vulnerable Transactions" go on to ink in the detail.

See also:

http://www.russell-cooke.co.uk/media/2034/overview_of_directors_duties_u...

Under:
QUOTE"Duties of Directors"
However where there is an insolvency or a threat of an insolvency case law has specified that the interests of the company are to be regarded as broadly equivalent to the interests of the creditors of the company.... As such a director should act in the best interests of the creditors in an insolvency situation.

“In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, theyauthorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude… it is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.”

Street CJ in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 730 quoted in West Mercia Safetyware Ltd v Dodd [1988] B.C.L.C. 250. UNQUOTE

Footnote: All of which may be a moot point so far as the OP is concerned now that he has divulged the company owns a substantial value of stock, not to mention some unutilised tax losses, so is evidently far from being insolvent. Unless of course there are any more twists in the tale.

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By DJKL
to I'msorryIhaven'taclue
17th Oct 2017 11:53

I get the vulnerable position, I get the preference risk of directors in anticipation of insolvency repaying themselves first, and I get removing a right for them to vote in say a CVA (to a degree), but I really struggle to understand why, re priority of payment in liquidation, directors, and family of directors, ought to be at a disadvantage re payments compared with other unsecured creditors, it just does not sit well re my thoughs re equity and fairness.

However you have made me feel a little better, if it arises from CA 2006 I am only 11 years out of date!!!!! For a bit I was wondering if IA 1986 was the cause (even had a skim read last night) and in the intervening 31 years , taking place, as it did, after I had dealt with the ICAS law requirements in 1985(with a very, very, narrow pass in business law) I had missed the change.

As can be guessed insolvency work has barely touched my entire working life in accountancy.

Edit- have looked at the links etc you provided but still having difficulty spotting the statutory smoking gun, most of the links are re duty of care/actions of directors not ranking of creditors in an event of insolvency.

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to DJKL
17th Oct 2017 12:36

DJKL wrote:

As can be guessed insolvency work has barely touched my entire working life in accountancy.

Same here, but when it did touch my life a few years ago it took our side to the High Court.

I got to see this particular aspect in action with the liquidators where creditors, HMRC included, argued that long after they had passed the point of no return the directors enriched themselves by inter alia drawing down their DLAs (at the expense of paying off £2m of unsecured creditors).

Years on and the liquidators still haven't reached a conclusion, but a reversal of those enriching transactions seems the likeliest outcome (there were other aggravating factors - continuing to trade and receive customers' funds, for example - that also make wrongful trading a potential outcome).

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By DJKL
to I'msorryIhaven'taclue
17th Oct 2017 13:01

Yes, but that surely is not re ranking in insolvency but re preference re prior transactions.

There was always , even in the dark ages, the issue of preference, and directors' responsibilities, and CA2006 seems to merely codifiy that, but it does not, as far as I can see, introduce a statutory basis for creditors, being connected, ranking behind other unsecured creditors, but yet various websites imply this without citing sources.

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to DJKL
17th Oct 2017 16:15

Well yes, in that particular case the major aggravating factor was preference over (and liability for) transactions made long after the directors should have drawn stumps. All of which opened the door for a wrongful trading investigation, which is quite another matter.

So ok, CA2006 codified what had up until then been dark-ages common law; and under *s172(1) there is a (non-exhaustive) list of matters a director must have regard to in order to fulfil his "duty to promote the success of the company". However, in the oft found pattern of rule & exception in UK law, s172(3) gives a nod in the direction of an exception relating to creditors viz:
*s172(3) "The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."

*source: https://www.legislation.gov.uk/ukpga/2006/46/section/172

And in my non-specialist understanding that exception relating to creditors allows room for common law precedent [such as the ruling by Street CJ in Kinsela v Russell Kinsela Pty Ltd (in liq) (1986) that I quoted from earlier in this thread] to take precedence over the statute. I guess it's only natural that a good deal of such case law will involve insolvency, or at least some inability to pay creditors because of the actions or omissions of a director(s).

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By RichJ
16th Oct 2017 17:18

Thanks for the responses guys, I knew it wasn't going to be as making a simple transfer!

One thing to mention which may work is the dormant company does have unused stock with a MV of around £70-80k too. Both companies are/were in the same trade as hairdressers.

So could the active company purchase the stock in the dormant company so when the cash comes in from this the director could draw it down against his DLA?

The dormant company also has b/fwd tax losses of c.£60k so this could be used against the profit from the sale of the stock.

It is another avenue I am looking into....

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to RichJ
16th Oct 2017 17:30

Doh! That was quite an important omission from your O.P.

I think you've already thought out your solution.

Just a thought, but as the trading company is a service company is their much to stop the active company from tipping all of its trading operations into the dormant company?

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to RichJ
16th Oct 2017 18:15

So this company isn't completely potless?

How about giving us a summary balance sheet ?

Personally, I wouldn't worry too much about dormant/active. the worst that can happen is you'd need to file micro accounts instead of dormant. Which is tantamount to no change.

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to RichJ
17th Oct 2017 11:48

RichJ wrote:

One thing to mention which may work is the dormant company does have unused stock with a MV of around £70-80k too. Both companies are/were in the same trade as hairdressers.

I'll repeat my earlier question: is there anything to prevent you from tipping the "active" company's trading operations into the "dormant" company? Is this not the same trade? Why would you want to forego the unutilised losses in "dormant" company?

RichJ wrote:

So could the active company purchase the stock in the dormant company so when the cash comes in from this the director could draw it down against his DLA?

Yes. But by "MV of around £70-£80k" do you mean its retail value? You might be on a sticky wicket if you transfer this stock to "trading" co at anything above its cost price.

RichJ wrote:

The dormant company also has b/fwd tax losses of c.£60k so this could be used against the profit from the sale of the stock.

So if you want to wind down "dormant" company an obvious workaround is to sell its "£70-£80k" of stock directly to the end user (via "trading" company's outlets, on a sale or return basis, if you will). Dormant co collects £70-£80k, utilises some or all of its tax losses, and pays off a large chunk of the director's DLA. You could even keep that going, by allowing "Dormant" co to purchase stock replenishment until such time as the full £100k DLA is repaid; or until the tax losses are fully utilised.

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By RichJ
to I'msorryIhaven'taclue
17th Oct 2017 16:15

Thanks, and this is the avenue we are now looking at. It is a new company to us as they only came on board a few weeks ago and as far as I know there is no plans for the client to "reactivate" the now dormant company (I think there are historical reasons for this) but the sale of stock seems like the ideal answer.

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17th Oct 2017 07:46

Let’s keep this simple: unless the debtor company is insolvent (in which case the director would be transferring his own bad debt to his other company) there is not the slightest difficulty with what is proposed.

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By Ruddles
to johngroganjga
17th Oct 2017 10:54

Although the end-result may be relatively simple to achieve there is a slight difficulty in that legally a debt cannot be simply transferred from one debtor to another.

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to Ruddles
17th Oct 2017 11:02

Not without agreement of course. But that is hardly likely to be an issue here, or else the OP would not have asked his question.

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By Ruddles
to johngroganjga
17th Oct 2017 11:42

Novation

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17th Oct 2017 09:11

Wouldn't S459 CTA 2010 come into play if you simply make a loan from Newco to Oldco?

From HMRC Guidance
Company D is a close company. Instead of making a loan directly to X, an individual participator, it makes it to an associated company, Company E. Company E then passes the loan to X. The loan by one company to the other is treated as if it had been made direct to X.
CTA10/S459 was enacted specifically to cover this situation (loan followed by loan) though it also covers other indirect transfers of value.

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to JCresswellTax
17th Oct 2017 09:27

This is a loan BY the director and not TO him. And he is a participator in both companies. S459 is about a loan by a company to a person who is not a participator financed by a loan from a company in which the person is a participator.

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to johngroganjga
18th Oct 2017 15:45

johngroganjga wrote:

This is a loan BY the director and not TO him.

Doesn't that depend on how you view it?

From JCresswell's HMRC Guidance:
Company D is a close company. Instead of making a loan directly to X, an individual participator, it makes it to an associated company, Company E. Company E then passes the loan to X. The loan by one company to the other is treated as if it had been made direct to X.

Adjusting that to the facts of our case:
Company "Active" is a close company. Instead of making a loan directly to X, an individual participator, it makes it to an associated company, "Company Dormant". Company "Dormant" then passes the loan to X. The loan by one company [Company "Active"] to the other ["Company "Dormant"] is treated as if it had been made direct [by Company "Active"] to X.

For me the question is whether it matters that Company E (or "Dormant" Company in our case) happens to already owe money to X. Is Company "Active" loaning money to Company "Dormant" so that the latter may discharge its existing debt to X? Or will the loan by Company "Active" be treated as a loan directly to X?

johngroganjga wrote:
And he is a participator in both companies. S459 is about a loan by a company to a person who is not a participator financed by a loan from a company in which the person is a participator.

Well in JCresswell's HMRC example, as reproduced above, we're not specifically told whether "X" is a participator in BOTH companies.

But, from HMRC's same CTA10/S459 Guidance:
QUOTE Section 459 deals with some loan arrangements where the loan is not made directly to an individual participator in the company (or an associate of a participator). UNQUOTE

Surely the key word here on which the inflection should be placed is directly (because the loan is not being made directly, but indirectly). I can't see it make much difference whether or not X is a participator in Company E or, instead, an associate of a participator in Company E.

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