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Subsidiary debt satisfied by shares to holding co.

Can a 100% subsidiary debt be satisfied by an issue of shares to the holding company?

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A 100% owned subsidiary trading company does work for Startup company. Startup can't pay now but offers to give shares in their company which is accepted and formally agreed. Holding company holds investments and prefers to hold the investment in this startup instead of keeping in subsidiary. So Startup issues shares to holding company instead, as formally agreed, and holding company pays subsidiary to satisfy the debt. 

Technical advice given to me is that the shares should be reflected as received in subsidiary to satisfy debt and then transferred to holding company at same time which seems cumbersome. As long as it is a commercial arrangement and there are commercial agreements in place surely the shares can go straight to the holding company? 

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By johngroganjga
23rd Sep 2019 12:11

What sort of technical advice was it? Yes of course the subsidiary can take the issue of shares by its debtor to its holding company as a good discharge of the debtor’s debt to it.

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By Ambereen Shamsi
23rd Sep 2019 12:59

Thanks John - the contention is whether the shares in the startup should go via the subsidiary or can go straight to holding company with agreement that holding company will satisfy the subsidiary debt directly rather than the debtor.

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By paul.benny
23rd Sep 2019 14:08

Or even Holding could subscribe for the shares and Startup use the funds to settle its liability to Subsid.

Depending on the sums involved, I'd do a bit of legal due diligence (eg does Startup have authority to issue the shares, what % holding will your client have, if there are multiple share classes, which one are we getting).

I'd also be looking for some legal documentation to formalise the different legs of the transaction - and possibly also a shareholder agreement.

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By Ambereen Shamsi
23rd Sep 2019 14:27

'Or even Holding could subscribe for the shares and Startup use the funds to settle its liability to Subsid' - yes, seems better this way, thanks.

Re legals, also agree, needs to be good documentation in place.

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