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Loan agreement - lender gives nothing in exchange for debt

Loan agreement - lender gives nothing in exchange for debt

Postby thetraveler » Thu Mar 31, 2016 2:46 pm

Is it possible under UK law for a company to issue loan notes to another company but receive nothing in return?

ie. company A issues £2m of loan notes to company B, and company B does not provide any assets or cash in return (but perhaps a nominal service)?

I know it doesn't make sense commercially but the companies are related, company A is subsidiary of company B, so it is just a way of making sure there's a mechanism for ensuring cash can be easily remitted from subsidiary to parent assuming there is no option to distribute dividends.

Thanks!
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Re: Loan agreement - lender gives nothing in exchange for de

Postby atticus » Thu Mar 31, 2016 4:24 pm

Yes, it is possible.

If there is no consideration, then this should be done by deed.

If the company should subsequently go into liquidation, it is possible that this arrangement may be set aside on the application of the liquidator.

If this is a real situation - take legal advice!
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Re: Loan agreement - lender gives nothing in exchange for de

Postby jantra » Thu Oct 06, 2016 7:48 am

can't the subsidiary issue new shares in itself, acquired by the parent. Then at a later date the subsidiary can buy back the shares from the parent. The benefit of this is that it is not a liability for the subsidiary in the strictest sense (as it is equity) but remains an asset of the parent. The downside is precedence of debt upon wind up.
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Re: Loan agreement - lender gives nothing in exchange for de

Postby dls » Thu Oct 06, 2016 11:23 am

Nominal consideration is consideration enough to make the contract binding.

As has been said, a challenge to that would come on any insolvency. Also the tax man may want a good look.
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Re: Loan agreement - lender gives nothing in exchange for de

Postby jantra » Fri Oct 07, 2016 7:32 pm

i cant see the taxman being interested as its outside vat and the parent/sub form part of a corp tax group..
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