Write Off Intercompany Debtors And Creditors

How to write off intercompany transactions on liquidation

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I have a client (a UK based individual) who owns 100% of Companies A, B and C (all UK micro companies).

There are intercompany balances between the three companies relating to money moved between the companies (not invoices for work completed).

Company A will soon begin the liquidation process.

Could anyone please confirm how to deal with the intercompany balances on both sides assuming the balances are not repaid.

If there is an intercompany debtor balance in company A with company B I presume the liquidation process will deal with this accordingly and the asset will be distributed to the shareholders; or does this need to be written off in company A, if so to where? How is this dealt with in company B? In company B what would the debit side of the journal be posted to?

Also, if there is an intercompany creditor balance in company A with company C how is this dealt with regarding the journal in both companies? I do not need to know about the implications of a creditor balance in company A on liquidation, I am just considering the journals required in both companies for now.

Thanks in advance for any assistance.

Replies (24)

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By johngroganjga
16th Jun 2020 09:34

Once the liquidator is appointed he or she will take control and the days of putting journal entries through company A's books, and similar niceties, will be well and truly over.

You don't mention the financial position of company A - i.e. whether it is solvent or not. However on first principles, expect the liquidator to collect the sum due to A by B, and then pay the sum due to C by A.

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By Truthsayer
16th Jun 2020 10:01

You need to tell us more about this liquidation. Who is doing it? Is it voluntary, and being done by yourself? Are the companies in a position to pay each other's balances?

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By Hull Accountant
16th Jun 2020 14:04

Thanks for the replies.
For the purpose of answering this question.
1.) Assuming Company A is solvent by £700k but Company B is not in a position to settle the debt owed to Company A then how would this be dealt with in the accounts of Company B?
2.) Assuming Company A is solvent by £50k but owes Company C £300k (and will not collect the debt from Company B) how would this be dealt with in the accounts of Company C?
There will be a formal MVL.
Thanks again.

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Replying to Hull Accountant:
By johngroganjga
16th Jun 2020 15:12

These questions are all for the liquidator. Why are you asking us?

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Replying to johngroganjga:
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By Hull Accountant
16th Jun 2020 17:59

I look the view that the liquidator would deal with Company A. My question relates to the journals needed in companies B and C. Do you know what these journals would be?
Thanks.

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Lisa Thomas
By Lisa Thomas - Insolvency Practitioner
16th Jun 2020 14:09

If B is insolvent, what is happening with it?

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By Hull Accountant
16th Jun 2020 14:28

Thanks for the reply.
For the purposes of gaining an answer to this question assume Company B is not insolvent. Assume it is solvent but does not have the available cash to repay the intercompany debt.

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Replying to Hull Accountant:
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By Paul Crowley
16th Jun 2020 15:15

Can it pay its debts as they fall due?
B needs to borrow

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Replying to Hull Accountant:
Lisa Thomas
By Lisa Thomas - Insolvency Practitioner
16th Jun 2020 15:53

If the debt is overdue then technically B is insolvent...

Usually The Liquidator would collect the debt in but this can cause delays and extra costs. the alternative might be to assign the debt to the shareholders and transfer it as a distribution in specie.

The Liquidator can advise.

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Replying to Insolvency Practitioner:
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By Hull Accountant
16th Jun 2020 18:37

Thanks for this.
Are you therefore suggesting that if the debt is assigned to the shareholders and transferred as a dividend in specie then the journal in company B would be Debit Intercompany Creditor Credit Directors Loan Account?
Thanks.

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Replying to Hull Accountant:
Lisa Thomas
By Lisa Thomas - Insolvency Practitioner
16th Jun 2020 15:53

If the debt is overdue then technically B is insolvent...

Usually The Liquidator would collect the debt in but this can cause delays and extra costs. the alternative might be to assign the debt to the shareholders and transfer it as a distribution in specie.

The Liquidator can advise.

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Replying to Insolvency Practitioner:
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By Hull Accountant
21st Jun 2020 22:33

Thanks for this.
Are you therefore suggesting that if the debt is assigned to the shareholders and transferred as a dividend in specie then the journal in company B would be Debit Intercompany Creditor Credit Directors Loan Account?
Thanks.

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By Hull Accountant
16th Jun 2020 15:23

Thanks for the replies but I think the answers are going off track a little.
The original question was what would the journals be in Company B and Company C in the scenarios originally proposed.
Thanks

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Replying to Hull Accountant:
paddle steamer
By DJKL
16th Jun 2020 15:46

What is the owner trying to achieve?

If he wants to wind up A, and A is owed money by B that currently B cannot pay, just distribute said loan in A to the shareholder of A and then Company B owes former shareholder of A instead- this might be quite tax efficient re extraction of monies from B in future.

Slightly trickier if Company A owes Company C, what you do not say is what if any cash is in each balance sheet as maybe it can be sorted by moving cash/assets round the houses.

I think the first question is , what is Mr Shareholder trying to achieve by winding up Co A and why now?

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Replying to DJKL:
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By Paul Crowley
16th Jun 2020 15:53

Agree What is looking to be achieved

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Replying to Hull Accountant:
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By Paul Crowley
16th Jun 2020 21:01

But how is that possible if the figures are either unhown or variable, and the tranactions need to be understood. Substance over form

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Replying to Hull Accountant:
By johngroganjga
16th Jun 2020 15:57

There are no journal entries required for B. It can either pay its debt to A, or it can’t.

C may have a bad debt if A descends into insolvency and can’t pay it. Are you actually asking what entry to make to recognise a bad debt?

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Replying to Hull Accountant:
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By Hull Accountant
16th Jun 2020 18:19

DJKL - The owner is winding up Company A and claiming entrepreneurs relief. Are you suggesting the journal in Company B will be Debit Intercompany Creditor Credit Directors Loan Account? If so this would be tax efficient as you suggest.
Your suggestion regarding moving cash around the companies is one reason I am asking this question. If I can understand the journals required I can advise on cash movements before liquidation if legal/allowable to do so.

John - I do not understand how there are no journals for Company B or C. For example if Company B's accounts include an intercompany creditor with Company A surely this does not remain on the accounts of Company B after Company A no longer exists?
I do not believe your bad debt comment is relevant as these are not invoice related debts, these are just previous movements of money. Please correct me if I am wrong.

Thanks.

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Replying to Hull Accountant:
By johngroganjga
16th Jun 2020 20:59

The liquidation of A can’t be completed until the debt due to it by B is dealt with. So your scenario whereby B is left with an unpaid liability to a company that no longer exists is fantasy.

Regardless of how A’s debt to C arose, if A is insolvent and can’t pay it, what kind of debt would it be in C’s books, if not a bad one?

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Replying to Hull Accountant:
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By Paul Crowley
16th Jun 2020 21:18

So no company is insolvent. But no real idea what A is worth? A does not intend to collect debt from B or pay debt to C. Who is dealing with the MVL?
Does A have anything that is going to be sold?

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Replying to Hull Accountant:
paddle steamer
By DJKL
16th Jun 2020 21:45

I am suggesting that as A is to be wound up it must have some assets, you say circa £700k, what are these assets, are they liquid?

These assets are in part at least , ex costs, going to come to Company A's shareholder on winding up

If a chunk of these assets are liquid can Mr Liquidator not agree to make an interim distribution to the shareholder of A upon winding up, Shareholder then lends some cash to Company B, company B then uses said cash to repay company A, liquidator then finishes distributing Company A balance of cash to shareholder.

Company A then killed and company B owes director sum he lent it, no journals, everything follows the movement of the money.

So in Company A

Dr interim liquidation payments £100
Cr Bank £100

In Shareholder personal account

Dr Bank £100
Cr Int dist received £100

Then

Dr loan to Co B £100
Cr bank £100

Then in Company B

Dr Bank £100
Cr loan from shareholder £100

Then

Dr Loan due to Co A £100
Cr Bank £100

Finally in Company A

Dr Bank £100
Cr loan due from Co B £100

Then

Dr Final distribution to shareholder £100
Cr Bank £100

If no liquid funds in A to start with can shareholder bridge borrowings to get hold of the sum, to be paid round the houses and come back to him, a few days at most if properly planned re timing.

No journals then needed, merely record bank transactions and follow the money.

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Replying to DJKL:
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By Paul Crowley
16th Jun 2020 22:16

Best to get a bounce back loan to make this all possible. What extra journals would be needed?

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Replying to DJKL:
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By Hull Accountant
21st Jun 2020 22:37

Thank you very much for this response.
This has answered the question.
Thanks again.

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By tom123
16th Jun 2020 20:05

So, money just turns up in the bank of one company from another, and there are no invoices to document why this should happen?

Not surprised this is messy.

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