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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: computational rules: credits not brought into account: releases of debt: debt/equity swaps: ‘in consideration of shares’: examples

Release of debt must be in consideration for shares: examples

Example 1

Company A owes £80 million to an unrelated bank, but is unlikely to be able to repay the loan. As part of a refinancing of the group of which Company A belongs, the bank agrees to release the loan. Company A issues 100 ‘B’ ordinary shares to the bank. These shares carry a right to a return of the nominal value in a winding-up, but are non-voting and have only limited rights to dividends. The market value of the shares on issue is only £500.

The bank believes that the underlying business of the A group is viable and accepts the shares in the hope that their value will increase in due course. However, in the course of a subsequent review, the bank decides that its initial assumptions were over-optimistic, and decides to seek a buyer for the shares, which it sells for their market value at the time of their sale.

S322(4) is not prevented from applying just because the bank does not hold the shares long-term. The release of the debt was in consideration of the shares; this is unaffected by the later commercial decision by the bank to sell the shares.

Example 2

The facts are the same as in Example 1, except that Company A is owned as a joint venture between its parent, Company B, and unconnected Company C. Under the terms of a wider rescue of Company A, Company C is to buy out Company B’s interest, and provide guarantees for Company A’s other debts. Company C acquires both the shares issued by Company A to the bank, and Company B’s holding in Company A, at market value.

In the context of the wider rescue of Company A, HMRC will accept that the release is in consideration of the issue of shares by Company A to the bank.

HMRC will also accept variations on such a scenario, for example, where Company C has pre-emption rights if the bank decides to sell its shares, or under option arrangements that give Company C the right to acquire the shares at a later date, at market value, will qualify for the exemption in CTA09/S322(4).

Example 3

The facts are the same as in Example 1, but the existing shareholders of Company A do not wish to have the value of their holdings diluted by the issue of new shares or to have the bank as a shareholder. Contractual arrangements are put in place under which, immediately after the shares are issued to the bank, the bank will sell the shares to the existing shareholders for £500.

In the absence of any other reason for issuing shares rather than simply releasing the debt, a realistic view of the facts is that the consideration which the bank receives for releasing the debt is not the shares, but the £500 cash. The only reason for the issue of the shares is to enable the existing shareholders to benefit from the exemption, and it is unlikely that HMRC would provide a clearance on the application of S322(4) to such a case.