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Intercompany loan - lender is insolvent

What happens to the loan made from one company of mine to another if lender is insolvent?

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I have a consultancy company (L) where I have a small amount of cash sitting, that I want to use towards purchasing a property. However, mortgage lenders want a clean new SPV with a SIC code that is related to property (L has a tech consultancy SIC code)

I am being asked to create a new company (B) which will take a intercompany loan from L, and also borrow from a mortgage lender (M) to purchase a property (P). M will have first-charge on the property P of course as usual

My question is : how can I ensure that the fate of the property (held by B) is not linked to the fate of lender L (i.e. if Lender L needs to be liquidated in the future for some reason (say litigation or some other reason), how should the Loan from L to B be documented so that a litigation and potential cash crunch of the lender L cannot mean that the loan has to be repaid early by B

Am I right in saying that I have to do the following?

  1. The loan should be at arm's length between L and B - i.e. pay a market interest rate
  2. The loan needs to be a perpetual loan or at least a very long maturity like 25 years

Are there other considerations i need to know in this case?
Thanks

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By David Ex
19th Jul 2021 21:21

dowjones123 wrote:

Am I right in saying that I have to do the following?

1 The loan should be at arm's length between L and B - i.e. pay a market interest rate
2 The loan needs to be a perpetual loan or at least a very long maturity like 25 years

Where did you get that information from?

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Replying to David Ex:
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By dowjones123
19th Jul 2021 21:27

David Ex wrote:

dowjones123 wrote:

Am I right in saying that I have to do the following?

1 The loan should be at arm's length between L and B - i.e. pay a market interest rate
2 The loan needs to be a perpetual loan or at least a very long maturity like 25 years

Where did you get that information from?

This is just my assumption - i thought at least (1) The loan should be at arm's length between L and B - should be the minimum requirement else the loan will not be considered a true loan (if there is not a fair interest rate charged).

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Replying to dowjones123:
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By David Ex
19th Jul 2021 23:06

dowjones123 wrote:

This is just my assumption

If you don’t have the necessary understanding, you’d be well advised to take professional advice. You don’t say how much you are investing but I imagine it’s not a trivial sum. The person who usually deals with your affairs and knows you and your business would be best placed.

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Replying to dowjones123:
Stepurhan
By stepurhan
20th Jul 2021 09:22

dowjones123 wrote:

This is just my assumption - i thought at least


If you're already making assumptions, then that is a very bad position to be in on what is, presumably, a valuable transaction.

Take professional advice, both legal and accounting.

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By Tax Dragon
20th Jul 2021 07:12

You could take the small amount of cash out of the company. There might be an even smaller amount of tax on that, but it saves the legal fees and means you could pump the money into B and B would not be in danger from L.

If there are legal reasons you can't do that, then it sounds like you need to spend a small amount on fees - by the sounds of it, legal fees - to discuss your issues.

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