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Parent Company Clearing Trade Creditors Treatment

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Hello

A parent company transferred money to its subsidiary, which it own's 100% money to clear all trade creditors balance in preparation to sell the subsidiary to one of it's employee's.  This is not an inter-company debt, it is a freebie!  How do I record this  in the statutory accounts?

Thank you

Replies (23)

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By Duggimon
03rd Sep 2021 13:03

If you don't want it to be a loan, and I presume you don't want it to be income lest it become taxable on the subsidiary, you'll need some sort of other way of classifying it. The obvious way (to me, others may differ) of doing so would be to consider it an increase in the investment in the subsidiary, but that requires more than just an allocation in the books.

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By David Ex
03rd Sep 2021 13:15

How does the legal documentation describe the transactions?

I’d look at that and come back and update us.

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Replying to David Ex:
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By gedmond72
03rd Sep 2021 13:36

Thank you David Ex.

The only documentation I have is the share transfer from the parent company to the employee of the subsidiary.

The aim of the cash transfer was to pay off the trade creditors to make the acquisition cash neutral.

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Replying to gedmond72:
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By paul.benny
03rd Sep 2021 13:54

gedmond72 wrote:

The only documentation I have is the share transfer from the parent company to the employee of the subsidiary.

If that's the only documentation, the parties were most unwise.

You said that the monies were to settle trade creditors. What about any other liabilities - such as VAT, PAYE, corporation tax, accrued costs? What about claims from employees/customers (eg warranty)? What about any existing contracts such as leases. Etc

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Replying to paul.benny:
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By gedmond72
03rd Sep 2021 14:22

Hi Paul.benny

The t's and c's says the following "the transaction hereby effected shall comprise a cash neutral acquisition of the company as at the completion date, giving effect to the accumulated balance sheet debts of the company which shall be forgiven to the company and registered as a loss in the accounts of the seller. The position hereby affected shall reflect the terms of the draft balance sheet annexed and executed as relative hereto"

Sorry the money was also to clear vat, paye and other liabilities. No warranty/employee claims and there were no leases etc.

Thank you

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Replying to gedmond72:
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By paul.benny
03rd Sep 2021 14:43

No idea what that's meant to mean.

Well, I sort of do but it suggests a lawyer that doesn't really know what they're doing when it comes to drafting a SPA and hasn't even considered any possible tax consequences of the transaction.

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Replying to paul.benny:
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By gedmond72
03rd Sep 2021 14:55

Haha, yes your are very correct. But the lovely lawyer has left me with the task of sorting it out.

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Replying to gedmond72:
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By paul.benny
03rd Sep 2021 16:25

Is buyer or seller your client?
Given the woeful agreement, I'd suggest working backwards:
- work through some various accounting treatments - such as a gift, a loan which is written off after sale, equity injection (as suggested above)
- determine the tax treatment of each for your client and agree a preferred option with the other party.
- document - preferably using a lawyer that knows what they're doing.

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Replying to paul.benny:
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By gedmond72
03rd Sep 2021 16:53

My client is the buyer. The intercompany balances were written off by the parent company after it was sold to my client/buyer for £1. I am thinking that I write these balances off under the same way, i.e. gift?

Thanks

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Replying to gedmond72:
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By Paul Crowley
03rd Sep 2021 17:06

The company received money
It presumably claimed tax relief on the costs associated with the creditors?

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Replying to Paul Crowley:
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By gedmond72
03rd Sep 2021 17:50

They received money to pay the creditors.

I havent got to that stage yet, I am still trying to sort out how to record the money received and the write off of the intercompany balance with the parent company.

Doesnt help that the buyer/client has sinced passed away and the seller/parent company wont communicate.

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Replying to gedmond72:
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By Hugo Fair
03rd Sep 2021 17:56

So you don't have a client any more?

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Replying to Hugo Fair:
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By gedmond72
03rd Sep 2021 18:31

No but I still have to prepare the statutory accounts for the period that he was alive, as the company is part of his estate.

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Replying to gedmond72:
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By Hugo Fair
03rd Sep 2021 18:47

Ah, was just checking that you'd been appointed by his executors (and weren't simply trying to finish off work under your previous appointment).
BTW, does the company have any remaining directors and/or shareholders?

Also, Paul Benny's suggestion of "working backwards" is probably not an option in the light of this news.
I presume the sale does pre-date death of buyer (and that he wasn't terminally ill at the time)?

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Replying to Hugo Fair:
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By gedmond72
06th Sep 2021 11:23

Hi Hugo Fair

I am still doing the work under the previous appointment.

There are no remaining directors/shareholders.

Yes the sale was 2 months before the sole director's death

Thanks

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Replying to gedmond72:
paddle steamer
By DJKL
06th Sep 2021 12:57

Does the company have any value now its shareholder/director is dead?

If not, if no net assets etc, I think I would step away and let it die.

I would also be looking at who/what is going to pay your fees.

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Replying to DJKL:
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By gedmond72
06th Sep 2021 13:58

Yes the company still has some value. Money in the bank to pay me, thankfully, otherwise, yes I would be dubious as to doing the work.

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Replying to gedmond72:
By Duggimon
06th Sep 2021 13:54

gedmond72 wrote:

Hi Hugo Fair

I am still doing the work under the previous appointment.

There are no remaining directors/shareholders.

Yes the sale was 2 months before the sole director's death

Thanks

Your appointment has ceased until such time as the shareholder (the estate of the deceased) appoints a new director(s) and they decide to re-appoint you.

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Replying to Duggimon:
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By gedmond72
06th Sep 2021 13:59

Thanks Duggimon

That detail has been overlooked, so thanks for pointing that out, will get that sorted asap.

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Replying to gedmond72:
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By Hugo Fair
06th Sep 2021 14:16

That's why I asked the question earlier ... so thanks to Duggimon for making the point more explicit.
In that spirit, please note that there are two steps before you "get that sorted asap" - and you can't be certain the new director will appoint you rather than someone else (or indeed that they will choose to spend funds on paying you).

And without being paranoid I'm worried that "the seller/parent company won't communicate". Is there any chance that they're trying to 'unwind' or even repudiate the deal (which was not obviously to their benefit)?

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Replying to Hugo Fair:
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By gedmond72
06th Sep 2021 14:59

Apologies Hugo Fair for not answering your question earlier.

I am confident that the new director will be his daughter or a family member and that they will appoint me, too late in the year, the accounts are due by the end of the month.

Unsure of what the parent company are playing at but interesting question Hugo Fair.

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Replying to gedmond72:
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By Paul Crowley
06th Sep 2021 15:34

Someone needs to authorise the accounts
That person needs to be a director (one that is alive)
Estate contoller can appoint a director
This could go wrong if you are only focussed on the £150 penalty and not the other issues
Do you have evidence that the other company has forgiven the debt?

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Replying to Duggimon:
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By Paul Crowley
06th Sep 2021 14:08

Concur
The estate owns the shares
The estate needs to appoint a director, and director decides who the accountant will be
Bank account should by now be frozen by bank
Director needed to unfreeze it

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