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Darren Rigden, Crowe Clarke Whitehill

Darren Rigden, Crowe Clarke Whitehill

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Time is right to consider converting loans to shares

Darren Rigden, Crowe Clarke Whitehill

Darren Rigden, Crowe Clarke Whitehill

Careful structuring of loans and shares can significantly improve a company’s balance sheet and credit rating making it easier to access cheaper credit and support growth, according to a leading Kent business adviser.

Darren Rigden, Partner at national audit, tax and advisory firm Crowe Clark Whitehill, believes that recently introduced accountancy standards mean that now is a good time for directors to consider intercompany loans.

His team at the firm’s offices in Maidstone and Tunbridge Wells is currently advising clients on the implications of the new UK Accounting standard, FRS 102, which came into effect in January this year.

The standard will require companies to ‘fair value’ most loans, including intercompany loans, and charge a nominal rate of interest. This technical accounting exercise will take time for directors to calculate and will impact upon net profit, even though cash will never be paid. Capitalising debt between group companies could avoid this but does require specialist advice.

Daren Rigden said: “As well as helping to raise finance, the conversion of debt in the form of loans to equity as shares, can be useful when negotiating a sale or acquisition. It can also help win new contracts by demonstrating financial strength to a potential client when they may be evaluating a tender.”

“It is important that shares must not be considered as a form of debt for accounting purposes otherwise they will be treated as debt and will be included as a liability on the balance sheet.”

When fixing the rights of shares, Crowe Clark Whitehill advises that the following issues should be considered:

  • Shares should not normally be redeemable or they will be treated as debt. However, an option whereby the issuer has the right to redeem shares does not result in them being reclassified as debt.  
  • The shares cannot carry a right to a fixed dividend. However, instruments can be issued with a link to dividend payments on other types of shares as a way of addressing this.
  • Shares can be a different class such as non-voting ‘Business’ shares. This allows the directors to pay dividends in different proportions to the other share classes.
  • Dividends can be cumulative or non-cumulative.

Careful consideration when structuring a company’s shares can help strengthen a balance sheet, but the documentation needs to be drafted by a lawyer in conjunction with an accountant as the rules are frequently updated by the UK’s accounting standard authorities.

For further advice on the implications of FRS 102 contact the Kent team on 01622 767676. 

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