CFM31130 | Loan relationships: related transactions: transferring debt

Transferring debt

A company can transfer its rights or liabilities by such methods, as listed in CTA09/S304(2), as

• selling them for consideration

• giving them away, or

• exchanging them

as long as the terms and conditions of the debt allow this; for example some debt may be non-transferable.

Rights

In some circumstances the company may be required to assign its rights by operation of law rather than by bargain.

Example

SDR Ltd holds £50,000 in loan notes of YV plc, to be redeemed in 10 years. Because of cash flow problems, it needs the money now, so it might

• sell the loan notes to JK Ltd, a third party

• exchange the loan notes with a third party for, say, government securities that it could cash quite easily.

These are both related transactions.

Liabilities

Liabilities cannot be assigned from the original debtor to another so as to free the original debtor from the obligations. The obligations may be delegated or sub-contracted, but normally the only way to transfer the obligations under a contract is by novation.

Novation

Liabilities can be transferred under English law and the law of many other jurisdictions under an operation of law called novation. A novation involves substituting a new debt for the original debt, where the lender remains the same person but the debtor is usually different. Novations often occur when companies are restructuring, and requires the agreement of all parties to the debt. In most cases, it will be clear from the documents that there is a tripartite agreement, although in some cases agreement can be inferred from conduct.

Debt transferred in a reorganisation or takeover

Inter-company debt transferred during company or group reorganisations may derive from the provision of goods or services and not from the lending of money between the group members. The debt may therefore not be a loan relationship.

Repos and stock loans

Profits and losses from transfers involving repos and stock loans are not treated as related transactions. See CFM45000.