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HMRC internal manual

Corporate Finance Manual

Old rules: loan relationships: connection and bad debts: insolvent creditor

Creditor in liquidation: position of creditor

This guidance applies to periods of account beginning before 1 January 2005

Where the creditor company

  • was subject to insolvency proceedings, and
  • was connected to the debtor prior to date of those proceedings

it could have bad debt relief for any amounts accruing after the date of the proceedings whether or not it continued to be connected to the debtor company (FA96/SCH9/PARA6A). This meant, for instance, that it could have bad debt relief for amounts of interest that would have accrued to it from a connected party loan but which it would never receive.

The current rules can be read at CFM35400.

Insolvency proceedings

These include a variety of situations, including provisional liquidation, administrative receivership and administration, and their equivalent in overseas law, as well as insolvent liquidation. When a company enters insolvency proceedings it is always a question of fact whether it remains under the control of the person or persons who controlled it prior to the date of the proceedings.

Creditor in liquidation: example

MN Ltd lent £30,000 on 1 August 2002 to another group company, GH Ltd, at annual interest of 10%. The whole group was in some financial difficulty and GH Ltd didn’t pay any interest. MN Ltd made up its accounts to 31 July each year. In the accounts to 31 July 2003 it wrote off the interest owed of £3,000. On 31 January 2004, MN Ltd went into insolvent liquidation.

Since the group was in financial difficulty, the debt was clearly bad and MN Ltd was unlikely to receive any interest. If there had been no special rules dealing with this situation, FA96/SCH9/PARA6 would have prevented MN Ltd from getting relief for its bad debts. MN Ltd could not depart from the assumption that the interest would be paid in full. This might have resulted in tax being payable on the interest accrued but not received, to the detriment of other creditors in MN Ltd’s liquidation. To prevent this, FA96/SCH9/PARA6A allowed the authorised arrangements for bad debts in FA96/SCH9/PARA5(1) to apply to amounts accruing after the date liquidation proceedings commenced. This provision applied in circumstances where the creditor’s insolvency proceedings did not sever the connection between the companies. If the proceedings did sever the connection between the parties, then the authorised arrangements for bad debts in FA96/SCH9/PARA5(1) would apply as usual.

There was no relief for any amounts accruing before the date of liquidation.