If you’re considering entering liquidation, you’ll likely have many questions about what happens next. In this blog, we’re looking at intercompany loans and what happens when the company goes into liquidation.
What is an intercompany loan?
We’ll be letting you know some examples that we’ve seen over the years. Let’s say you’re a director who owns more than one company. Company A has become insolvent, but a year or two before becoming insolvent, you, as a director, have lent another one of your companies an amount of money. This is called an intercompany loan.
Intercompany loans are not a problem when company A is continuing to trade as you would like it to and can afford to pay its bills. But let’s say company A has actually become insolvent.
What are some examples of intercompany loans?
One example is a business that had lent their property company a sizeable amount of money. They’d lent the property company £85,000 a few years previous. This was a problem in liquidation because the insolvency practitioner has to try and recover the money that has been lent.
The insolvency practitioner’s job is to try and reclaim the money that is owed to creditors. After the money has been collected, it is distributed between the creditors so that company debts can be paid off. In this case, the intercompany loan is an asset that sits on the balance sheet of the insolvent company.
If the property company has no equity and the insolvency practitioner has very little chance of recovering any money, it’s highly likely that the intercompany loan wouldn’t have been paid off. Instead, the loan would have been written off.
The property company that took the intercompany loan had a lot of equity, so the company had to pay all of the money back. It was organised that the company would pay back the £85,000 over 12 months. When the money was received, it was distributed among creditors.
In some cases, you can get a discount or a deal on an intercompany loan, but it depends on the financial standing of the company that took the loan. If the receiving company has property, cash and assets, it’s not going to get as good of a deal as another company that doesn’t have any assets.
Another company approached the team at 1st Business Rescue during Covid in the hospitality industry. The year before Covid, this company lent another company, a cafe owned by the same director, £50,000. Due to Covid, the original hospitality company became insolvent.
When they came to us, we had to assess their financial situation. We had to assess the likelihood of recovering the £50,000 that had been lent out. After assessing the situation, it became clear that there was actually no money left in the cafe. All the company owned was some tables, chairs and coffee equipment. This meant that the insolvency practitioner had to write off the loan, as there was no hope of recovering the money.
We hope this has helped you to understand how intercompany loans work. These are really important because if you’ve got one and you enter liquidation, you need to know how it will affect you and your business.