Tax implications of restructuring debt as part of an insolvency / corporate rescue
Last updated 25 March 2020
Many companies will be experiencing cash flow concerns as a result of the Coronavirus and may be in discussions with their banks and other lenders or creditors to renegotiate their financing arrangements. When a lender waives a company’s obligation to repay this would normally give rise to a taxable accounting credit. Certain exemptions are, however, available for companies in significant financial distress where there is a real prospect that they will be unable to repay their debts.
Where a company is released from all or part of its liabilities where either:
- The company is subject to a statutory insolvency arrangement; or
- One of the ‘insolvency conditions’ are met
then the accounting credit will be exempt for tax purposes.
The ‘insolvency conditions’ include insolvent liquidation, insolvent administration, insolvent receivership, provisional liquidation (including Northern Ireland Insolvency Orders), and equivalent rules outside the UK.
Material risk of insolvency – the corporate rescue exemption
It is common for parties to work together to try an prevent an actual insolvency through a debt for equity swap (see below), however, there can be regulatory or commercial restrictions which mean this isn’t possible in all cases.
Where a debt for equity swap is not possible further exemptions from a tax charge can apply where there is a material risk the company would be unable to meet its debts at some time in the next 12 months. These exemptions include full or partial releases of debt, as well as ‘amend and extend’ cases where there is a substantial modification or replacement of debts.
Debt for equity swaps
It is relatively common for banks / other lenders to agree to a restructuring of debt as a last resort to help alleviate a company’s financial distress in order to help secure some return to the lenders. Often the parties will enter into a debt-for-equity swap under which lender will release the debt in exchange for an equity interest in the borrower, and generally these can take place with no tax charge
For the avoidance of doubt, the debt for equity swap rules do not require an insolvency or financial distress (as with the corporate rescue exemption) and are potentially applicable in all circumstances.
Other features in debt restructurings
It is worth noting that debt restructurings will often have a number of complex features and specialist advice should be sought. Examples of other considerations include:
- Transfer or novation of debt to companies in the same group;
- Split of debts into tranches and the seniority changed;
- derivative contracts hedging the debt may be closed out or altered
Our specialists are available to assist, please get in touch.
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