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.

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.

With the economy in poor shape and personal debt still at high levels, the outlook is less than rosy for people who are facing insolvency. Even after the changes made by the Enterprise Act 2002, bankruptcy is still a difficult experience. This is especially true where the family home is the main asset of the bankrupt’s estate.

The trustee in bankruptcy will normally seek a possession order over the property so that it can be sold to satisfy the claims of creditors.

When deciding whether the possession order is to be granted, the court is obliged to consider:

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.

In Dynamex Friction Ltd v Amicus an administrator had dismissed the entire workforce immediately on being appointed because the company had no money to pay its debts. At that time no transferee of the insolvent business had been identified and there was no prospect of a sale. However, the administrator did shortly afterwards agree a sale of the remaining company assets to a newly formed purchaser company that had links with the directors of the ‘old’ company.

When a person is unable to pursue a claim against someone who has been made bankrupt on account of the bankruptcy having been discharged, it may still be possible to pursue the claim against the bankrupt’s insurers, following a recent ruling.

The case involved 12 claims for breach of trust against nine solicitors and a Mr Dixit Shah. It was brought by the Law Society and 19 of the various clients of the solicitors.