Converting directors loan into shares

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I have a client who has enquired about using £100k of his existing £300k directors loan to issue additional shares so that the balance sheet for the most recent accounts is solvent. The business has spent years developing and is recently starting to show good profits and within the next 12 months should be solvent anyway. At this point the client has suggested that the company can then buy back the additional issued shares for £100k. I presume no capital gain on the director as bought for £100k and sold for £100k. 

This is not something I have dealt with previously and can't see any problems but have come across mixed advice when trying to look into this matter. Any advice would be greatly appreciated.

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By paul.benny
12th Mar 2021 15:59

What problem is director trying to solve?

If it's about trade credit, it would only make a difference if accounts showing a positive balance sheet are at Companies House - so timing and dates become important. And even then small company accounts give so little information and are so old that (in my experience) few suppliers rely on them

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Replying to paul.benny:
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By groundy
12th Mar 2021 16:16

The client is from a big company background and likes the idea of the accounts appearing solvent. All seems a waste of time to me but he has asked me to pursue his options, hence the question.

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By Tax Dragon
12th Mar 2021 16:37

When you say "most recent accounts", do you mean "the accounts for the period we are now in" (i.e. the next accounts, or even the next-but-one accounts)?

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By paul.benny
12th Mar 2021 16:56

You might want to look at s692 Companies Act:
https://www.legislation.gov.uk/ukpga/2006/46/section/692

Annual ceiling of £15,000 or 5% of capital.

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Replying to paul.benny:
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By Paul Crowley
12th Mar 2021 17:05

That could be the decider

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Replying to Paul Crowley:
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By Tax Dragon
12th Mar 2021 17:25

Well, you could defer the buyback until it wasn't unlawful.

But I'm still stuck on the timeline. The business has spent years developing (racking up a £300k debt to the director, who doesn't seem to have been worried about solvency before) and within the next 12 months should finally be solvent. But, before that happens (and quite possibly in the same period as it happens), he wants to capitalise 100k of the debt. Paul's opening Why? hasn't been answered. Not really.

Btw, I don't believe this would be tax neutral. I'm generalising (such a hypocrite!), but £100k of debt from an insolvent company is not normally worth £100k.

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Replying to paul.benny:
John Toon
By John Toon
12th Mar 2021 17:27

That isn't a cap on the repurchase of share capital by companies, more a relaxation of the rules (aimed at small companies) to buy back shares of minority holders without having to go through the normal share buy back process which is more convoluted.

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Replying to johnt27:
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By Paul Crowley
12th Mar 2021 17:37

This is a Tim & Giles type question
But Tim would understand all the rigmarole, having advised and done it all before.
Suggest OP contacts Tim and asks a price to sort this out
Client can afford

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RLI
By lionofludesch
12th Mar 2021 17:25

This is a "vanity" idea, isn't it ?

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John Toon
By John Toon
12th Mar 2021 17:34

For something that seems so temporary there appears to be little point. You could, maybe, consider whether this should be treated as a capital contribution. FRS 102 is vague on this but it would achieve the same aim, albeit may well fail on the basis the shareholder expects the money back, hence the current loan treatment.

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Red Leader
By Red Leader
12th Mar 2021 17:45

I suspect it's a classic case of an idea from a client that they want explored but don't really want to pay the time costs for.

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Replying to Red Leader:
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By Tax Dragon
12th Mar 2021 19:46

Still... why now?

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Replying to Tax Dragon:
RLI
By lionofludesch
12th Mar 2021 19:55

Just thought of this clever wheeze?

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paddle steamer
By DJKL
12th Mar 2021 22:52

Of course if the shares were the same class as his existing ones then it is possible (if he did not pay the same per share for the existing ones) that with pooling of the holding the base price of the bought back shares would not actually be £100k anyway, this anyway sounds like a terrible idea.

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By Calculatorboy
13th Mar 2021 01:44

why not just a simple note that the directors have agreed to support the company to the extent of their loan £x for the next
X months / years

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