Tax treatment in the hands of the creditor

Introduction

In the current economic crisis, an increasing number of companies are facing financial difficulties and potential insolvency. Unsurprisingly, at such times, tax issues can often be overlooked. This can lead to potential tax risks, lost opportunities and a failure to maximise assets. Correct planning can make a significant difference to the potential tax liabilities and maximisation of tax assets of a company or a group that is facing insolvency.

The UK generally distinguishes between “loan relationship” debts (e.g. loan receivables) and other debts (e.g. trading debt in respect of outstanding consideration for the sale of goods or services). It is possible to turn a trading debt into a loan relationship by issue of a debenture in respect of it.

Tax treatment in the hands of the creditor

Tax treatment in the hands of the creditor

If a creditor waives an intra-group receivable, this leads to an accounting loss in the amount of the receivable. Such loss, however, is not automatically tax-deductible in the hands of the creditor.

Currently, neither the Bankruptcy and Insolvency Act nor the Companies’ Creditors Arrangement Act defines “director.” However, pending legislative amendments to the Bankruptcy and Insolvency Act (BIA) and Companies’ Creditors Arrangement Act (CCAA) will include an expansive definition of “director” that includes any person “occupying the position of director,” regardless of his or her formal title.

An examination of the impact of an insolvent respondent in an arbitration.

In 2008, the catastrophic effect of the credit crunch spread to most world economies, touching governments, companies and individuals alike. As in previous recessions, insolvency is affecting increasing numbers of individuals and companies. UK government figures show that individual insolvencies went up by 8.8% in the third quarter of 2008, with corporate liquidations up by 10.5% in the same period. Commentators predict that this trend will only accelerate through 2009.

Distressed preferred shares are an important weapon in the arsenal of a restructuring lawyer. They allow distressed companies to reduce their borrowing costs by restructuring their debt in a way that gives a taxable Canadian resident corporate lender a tax-free return. This means that the lender can accept a dividend rate that is less than the interest rate on the debt it holds and receive the same economic return without losing the priority that came with holding secured debt.

We look at the recent case of Barlow Clowes International Ltd & Ors v Henwood [2008] EWCA Civ 577 which considers when a domicile of origin can be revived.

Background

In its judgment in Haine v Sec of State for BERR and the liquidator of Compounds Section Ltd the Court of Appeal has decided an important question on employer insolvency.

Although the global “credit crisis” phenomenon has been dominating the headlines for some time, the implications of it in Canada may just be beginning in the form of increased distressed M&A activity. The past decade of unprecedented growth and the abundance of liquidity has been replaced in the past few months by a more conservative lending environment. Around the country, bank loan officers are busy reviewing financial statements and covenant compliance certificates, and assessing loan renewals of corporate clientele.