UK Cash withdrawal

[Marko]

Hi all,

We're in the process of refinancing in the business in which I'm currently working and the plan is to increase the loan by £30M and withdraw it as cash to finance another project (outside of the business).

The directors have many other businesses/investments so I can't see this being repaid as such.

Unusual situation for me as, in my previous companies, we never even got out of the overdraft!!

What's the correct way to present this in the accounts, as I'm assuming there is no way to credit the cash [in the accounts] without showing a cost (/debtor) to the business??

 

[Dave In Capital]

First you want to ensure that the lender through which the loan was refinanced wasn't misled in any way, as that would make the company's officers liable for criminal fraud if the loan defaults. It's similar to misleading shareholders. For example, if the lender was under the impression that the £30M was to be used for going concern purposes ie business operations, then that would be concealment since, per your statement, the money is being siphoned into the personal business endeavors of the directors.

In other words, unless it can be established that the funds are being applied to the company's operations, these are effectively loans to directors. In which case, a whole host of other considerations become relevant.

If there are shareholders, then a requirement for shareholder approval of the loan might apply. Depending on the size of the loan and its terms of repayment, it could be construed by your nation's tax authority as another form of income subject to income taxes. For example in the US the IRS reserves the right to reclassify director's loans as income if it believes that the loans ultimately serve that purpose.

Also, regardless of any peripheral details, any loan of this nature is considered a no-arm's length transaction. In other words it's a related-party transaction, and there is plenty of literature on proper disclosure of these transactions in the financials.

 

[Marko]

Thank you for the comprehensive response, @Dave In Capital , much appreciated.

To be clear, the the negotiations with the bank are ongoing and fully transparent; we have the cash available to withdraw to fund other investments, but coversations with the bank are around increasing the existing loan and adjusting leverage covenants accordingly (while consolidating several smaller loans in the process).

My question is how would one best show the withdrawal in the accounts? The business is cash generative and will cover the finance costs etc. but the cash withdrawn won't be repaid by the owners.

Thanks again.

 

[Dave In Capital]

A loan that is originated with the intent of not being repaid is a form of compensation. In the US, loans to owners unless carefully documented as an arm's length transaction are generally considered a form of compensation by the IRS. Thus it is subject to payroll taxes. Also, it doesn't appear to qualify as a distribution since it isn't being paid from equity.