Pre Pack Administration

MVL’s – Overdrawn Loans to remain unpaid…

Recent clarity of rules from HMRC has resulted in great news for shareholders looking to take out their capital cash balances in solvent liquidations as HMRC have now confirmed that overdrawn loan accounts can be offset with distributions in specie by the Liquidator.

What this means for shareholders, is that there is now no debate whether loans must be repaid to avoid a tax charge on the unpaid loan, as instead, the loan is now considered discharged (avoiding the need to be repaid beforehand) when the liquidator distributes the net assets to the shareholder for an equal sum.  This distribution must be an on-paper distribution (in specie) whereby no cash changes hands and the result of which, effectively offsets the asset (the overdrawn loan account) with the distribution for an equal sum.

This clarification, should likely bring a surge in solvent liquidations as those hesitant director/shareholders who don’t like to part with their money to a stranger (the Insolvency Practitioner) and wait nervously to receive their funds, can now take their money as loans and have their Insolvency practitioner retrospectively correct these overdrawn loans with a paper exercise whereby only enough funds to cover the fees, costs (and creditors if any) are paid over.

I have to say that, if I were to work my whole life and build up a large value in my business, then be told that I must pass it onto someone I don’t know, for them to then pass it back a few days later, I would be hesitant and stress levels would be through the roof for those few days while I wait to receive the money back.  Therefore, I am sure that this news will be a welcome relief to most and no longer be a hurdle to put off any cautious business owners.

It does pose one risk to Insolvency Practitioners, in that there may be a risk that the insolvency practitioner has no pot of money to fund a claim against shareholders for the return of money to settle creditor claims that are found (that were previously unknown) but in my many years of doing solvent liquidations I have seen very few cases where this is ever required. Therefore, these changes are not a stumbling block to us undertaking these cases providing our standard deed of indemnity is signed and the accountant can vouch for the accuracy of the signed off accounts.

I am certainly looking forward to not having to deal with nervous shareholders while bank accounts are set up and transfers are made, or having to make many trips to the bank to sit waiting for sign off on the transfers and subsequent telephone verification from the fraud department, that is for sure.  Maybe it will even allow for cheaper costs?

As always, I must stress that I am not a qualified accountant and therefore this article can not be considered tax advice.  Specialist tax advice should be sought from a tax professional.

Here is a link to HMRC’s article/update in relation to this clarification in rules (for those of you that love the detail and rule/section reference:-

If you or your client are considering a solvent liquidation and want to talk it through with an IP or obtain a quotation, then please feel free to give us a call on 0800 612 6197.

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