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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Loan relationships: computational rules: credits not brought into account: releases of debt: debt/equity swaps: value of shares issued

Value of shares issued in a debt/equity swap

Most debt/equity swaps in distressed company situations will represent a bargain at arm’s length, even where there is a mismatch between the amount of the debt released and the market value of the shares issued in exchange. Typically, the share capital issued by the debtor company will be worth less (often much less) than the amount of the debt released. HMRC will not argue that S322(4) does not apply just because there is a wide disparity between the nominal amount of the debt released and the market value of the shares that are issued.

For example, a bank that is owed £100,000 by a company might release the debt in consideration of 4,000 £1 ordinary shares, which might have a market value of considerably less than £100,000. The parties will agree to this arrangement because the bank will almost certainly have already provided against the debt, and does not expect to receive more than the market value of those shares if it forced the debtor company into liquidation. If the debtor company is able to continue trading, the shares may become more valuable at a later date.

The debtor company will debit £100,000 to creditors, removing the debt from its books, and credit £4,000 to share capital and £96,000 to share premium account.

Companies that have adopted IFRS should, in accordance with IFRIC 19 (or UITF Abstract 47 for companies that apply FRS 26), take the difference between the carrying value of the debt that has been extinguished and the fair value of the shares issued to the income statement.

Other accounting treatments may be possible and would not affect the operation of CTA09/S322(4). The exemption will also apply in cases where accounting standards require the borrower to account for the shares as a financial liability rather than equity.