Q&As

Can the write-off of a loan made by one company to another be a distribution under Part 23 of the Companies Act 2006, where both the lending company and the borrowing company have the same majority shareholder?

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Published on LexisPSL on 20/06/2018

The following Corporate Q&A provides comprehensive and up to date legal information covering:

  • Can the write-off of a loan made by one company to another be a distribution under Part 23 of the Companies Act 2006, where both the lending company and the borrowing company have the same majority shareholder?
  • Definition of distribution
  • Has there been a distribution of assets?
  • Has there been a distribution by a company to its members?
  • Substance not form
  • Joint Working Party guidance

Can the write-off of a loan made by one company to another be a distribution under Part 23 of the Companies Act 2006, where both the lending company and the borrowing company have the same majority shareholder?

We can find no direct authority confirming that the write-off of a loan made by one company to another, where both the lending company and the borrowing company have the same majority shareholder, is a distribution under Part 23 of the Companies Act 2006 (CA 2006) or that it is not. There is a possibility that a court could view such a transaction as a distribution for these purposes and some careful analysis of the law and the facts will be necessary.

However, Stakefield (Midlands) and others v Doffman and another provides some useful guidance. The court found that the waiver by a company (S Ltd) of certain loans owed to it by other companies associated with it (by virtue of two of the shareholder/directors of S Ltd also being directors of those associated companies) was, on the facts, an (unlawful) distribution by S Ltd.

Definition of distribution

CA 2006, s 829 defines ‘distribution’ for the purposes of CA 2006, Pt 23 as every description of distribution of a company's assets to its members, whether in cash or otherwise, subject to the four specific exceptions. The write-off by a company of

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