assignment of intercompany loan

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Debt Assignment: How They Work, Considerations and Benefits

Daniel Liberto is a journalist with over 10 years of experience working with publications such as the Financial Times, The Independent, and Investors Chronicle.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Ryan Oakley

What Is Debt Assignment?

The term debt assignment refers to a transfer of debt , and all the associated rights and obligations, from a creditor to a third party. The assignment is a legal transfer to the other party, who then becomes the owner of the debt. In most cases, a debt assignment is issued to a debt collector who then assumes responsibility to collect the debt.

Key Takeaways

• Debt assignment is a transfer of debt, and all the associated rights and obligations, from a creditor to a third party (often a debt collector).
• The company assigning the debt may do so to improve its liquidity and/or to reduce its risk exposure.
• The debtor must be notified when a debt is assigned so they know who to make payments to and where to send them.
• Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA), a federal law overseen by the Federal Trade Commission (FTC).

How Debt Assignments Work

When a creditor lends an individual or business money, it does so with the confidence that the capital it lends out—as well as the interest payments charged for the privilege—is repaid in a timely fashion. The lender , or the extender of credit , will wait to recoup all the money owed according to the conditions and timeframe laid out in the contract.

In certain circumstances, the lender may decide it no longer wants to be responsible for servicing the loan and opt to sell the debt to a third party instead. Should that happen, a Notice of Assignment (NOA) is sent out to the debtor , the recipient of the loan, informing them that somebody else is now responsible for collecting any outstanding amount. This is referred to as a debt assignment.

The debtor must be notified when a debt is assigned to a third party so that they know who to make payments to and where to send them. If the debtor sends payments to the old creditor after the debt has been assigned, it is likely that the payments will not be accepted. This could cause the debtor to unintentionally default.

When a debtor receives such a notice, it's also generally a good idea for them to verify that the new creditor has recorded the correct total balance and monthly payment for the debt owed. In some cases, the new owner of the debt might even want to propose changes to the original terms of the loan. Should this path be pursued, the creditor is obligated to immediately notify the debtor and give them adequate time to respond.

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment.

Special Considerations

Third-party debt collectors are subject to the Fair Debt Collection Practices Act (FDCPA). The FDCPA, a federal law overseen by the Federal Trade Commission (FTC), restricts the means and methods by which third-party debt collectors can contact debtors, the time of day they can make contact, and the number of times they are allowed to call debtors.

If the FDCPA is violated, a debtor may be able to file suit against the debt collection company and the individual debt collector for damages and attorney fees within one year. The terms of the FDCPA are available for review on the FTC's website .

Benefits of Debt Assignment

There are several reasons why a creditor may decide to assign its debt to someone else. This option is often exercised to improve liquidity  and/or to reduce risk exposure. A lender may be urgently in need of a quick injection of capital. Alternatively, it might have accumulated lots of high-risk loans and be wary that many of them could default . In cases like these, creditors may be willing to get rid of them swiftly for pennies on the dollar if it means improving their financial outlook and appeasing worried investors. At other times, the creditor may decide the debt is too old to waste its resources on collections, or selling or assigning it to a third party to pick up the collection activity. In these instances, a company would not assign their debt to a third party.

Criticism of Debt Assignment

The process of assigning debt has drawn a fair bit of criticism, especially over the past few decades. Debt buyers have been accused of engaging in all kinds of unethical practices to get paid, including issuing threats and regularly harassing debtors. In some cases, they have also been charged with chasing up debts that have already been settled.

Federal Trade Commission. " Fair Debt Collection Practices Act ." Accessed June 29, 2021.

Federal Trade Commission. " Debt Collection FAQs ." Accessed June 29, 2021.

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Intercompany Debt — Is It Even Debt?

2013-Issue 40 —This edition of  Tax Advisor Weekly  updates our previous discussion on intercompany debt and outlines recent case law developments in this important area of tax law.

Two months ago, we discussed the practical considerations facing a CFO or tax executive in planning appropriate levels of subsidiary debt and intercompany debt. (See  “Intercompany Debt — How Much Is Reasonable?” 2013-Issue 32 .) Part of that analysis is the consideration of whether an instrument is characterized as debt or equity. In recent years, several large multinationals have been required to disclose Internal Revenue Service disallowances of billions in interest and related deductions that had been recognized on prior-year federal income tax returns. Often, the grounds for such a disallowance were that the company’s intercompany debt was more properly characterized as equity and, accordingly, that all related interest payments had been improperly deducted for U.S. federal tax purposes. The stakes are big, both for multinational corporations and the IRS with regard to potential adjustments in this area, so it should be no surprise that a number of cases address testing the approach taken by both the taxpayer and the IRS in making this debt versus equity analysis.

Courts have developed a long line of precedent since the 1913 inception of the income tax, providing insights into how to determine whether an instrument should be classified as debt or equity for U.S. income tax purposes. These cases apply a variety of factors to which they incorporate the facts and circumstances surrounding a particular instrument to make this determination. The result of this patchwork of case law has been the development and evolution of factors that may vary from court to court, from circuit to circuit. The number of factors and the weight ascribed to each may vary as well. Most courts apply 11 or more factors in their analyses. Five of the common factors were subsequently proscribed by Congress in Internal Code Section 385, the Code section enabling future Treasury regulations on the topic:

1) Whether there is a written unconditional promise to pay on demand or on a specified date a sum certain in money in return for an adequate consideration in money or money’s worth, and to pay a fixed rate of interest;

2) Whether there is subordination to or preference over any indebtedness of the corporation;

3) The ratio of debt to equity of the corporation;

4) Whether there is convertibility into the stock of the corporation; and

5) The relationship between holdings of stock in the corporation and holdings of the interest in question.

Because the statute indicated that the list of factors was not exclusive, the judicial differences persist. A consistency rule was added to Section 385 in 1992 to bind taxpayers to the label placed on the face of an instrument at the time of issuance. However, the IRS is afforded great latitude in challenging the characterization of an instrument as debt or equity and is explicitly not bound by the label ascribed to the instrument by the issuer. Given the latitude provided by the statute and emphasis on facts and circumstances, the issue is litigated regularly, and issuers have to rely on inconsistent judicial guidance when seeking to design instruments with a particular characterization.

A trio of cases decided by the Tax Court in 2012 addressed situations in which the IRS challenged the taxpayer’s characterization of its instruments as debt or equity. The Tax Court delivered two opinions in favor of the taxpayer on debt versus equity analyses. In  PepsiCo Puerto Rico, Inc. et al. v. Comm’r  (TC Memo 2012-269), the taxpayer prevailed in its argument that its instrument should be characterized as equity. Seeking the opposite characterization in  NA General Partnership, et al. v. Comm’r  (TC Memo 2012-172) (“ Scottish Power ”), Scottish Power convinced the Court that its instrument should be characterized as debt. In the third decision,  Hewlett-Packard Co. v. Comm’r  (TC Memo 2012-135), the Tax Court disagreed with the taxpayer, finding that Hewlett-Packard’s instrument actually reflected a debt obligation and was not an equity investment.

Scottish Power  provides insight into the Tax Court’s current approach to intercompany financing considerations, highlighting 11 key factors that the Tax Court considered in the case and that companies must consider when entering into intercompany debt arrangements:

1. The name given to the documents evidencing the indebtedness;

2. The presence of a fixed maturity date;

3. The source of the payments;

4. The right to enforce payments of principal and interest;

5. Participation in management;

6. A status equal to or inferior to that of regular corporate creditors;

7. The intent of the parties;

8. “Thin” or adequate capitalization;

9. Identity of interest between creditor and stockholder;

10. Payment of interest out of only dividend money; and

11. The corporation’s ability to obtain loans from outside lending institutions.

Despite the divergent characterizations sought by the taxpayers in  PepsiCo  and  Scottish Power , there were similar factual scenarios that the Tax Court’s opinions focused on that were absent in the  Hewlett-Packard  case. In both of those former cases, the taxpayer’s acquisition of entities as part of an effort to expand operations across borders necessitated the issuance of the instrument in controversy. Conversely, in  Hewlett-Packard , the foreign investment that predicated the instrument was constructed by an investment bank as a product to market to clients so as to generate foreign tax credits. The Tax Court focused on that credit generation as the substance of the transaction to disregard the conflicting form applied by the issuer.

In all three of the cases noted above, the Tax Court focused on whether the taxpayers’ actions were consistent with their intended characterization of the instrument. The Court found that the taxpayer in  Hewlett-Packard  had failed to act in a manner that a reasonable equity holder would have acted with respect to its subsidiary, and used that finding as the basis of its opinion to discredit Hewlett-Packard’s assertion that its instrument was equity. On the other hand, the efforts of PepsiCo and Scottish Power to adhere to the structure of their instruments were emphasized, and the taxpayers were given some leniency by the Tax Court for the instances in which they did not strictly follow the form of their instrument.

It seems likely that the existence of an ordinary course of business transaction with a strong business purpose contributed to the upholding of the taxpayers’ characterization in  PepsiCo  and  Scottish Power , but the lack of that business purpose in  Hewlett-Packard contributed to the recharacterization of the instrument. An IRS Special Counsel confirmed this following the release of the opinions, stating that “when the primary purpose of a transaction is to get to a tax answer . . . that does affect the analysis.” The three decisions noted above are part of an overall trend across both federal District Courts and the Tax Court that the IRS tends to be successful against taxpayers that entered into transactions with the primary purpose of obtaining a favorable tax answer and lacked a strong business purpose.

Regardless of the motivation for a company entering into an intercompany debt planning transaction, it is important to think through and properly document the transaction. The IRS and state and local taxing authorities are scrutinizing the substance of these transactions and have procedural tools in place to help them identify these issues during audit. Therefore, the disclosure of tax positions regarding debt versus equity classification may be required in two areas. First, the IRS specifically did not exclude these positions from the scope of disclosure required for uncertain tax positions on Schedule UTP in a 2010 announcement. Second, financial statement disclosures of the debt or equity classification position taken on an instrument may also be warranted under ASC 740, the codification of FAS 109, and ASC 740-10, the codification of FIN 48.

Several large multinationals have disclosed in their SEC filings that the IRS had examined the character of their intercompany instruments, something that could result in future rulings and guidance on this issue. For example, in 2007, Ingersoll-Rand PLC disclosed that interest paid on intercompany debt that it had incurred in connection with the company’s inversion had been disallowed by the IRS on the grounds that the instrument was equity. While the IRS later reversed its position, allowing the taxpayer to characterize the instrument as debt, it is safe to assume that Ingersoll-Rand incurred significant costs in defending the audit.

Alvarez & Marsal Taxand Says:

Companies that have in place, or are considering issuing, intercompany debt should ensure they have appropriate support for their intercompany financing arrangements in place prior to or contemporaneous with the transaction. While careful attention must be paid to developments in ongoing disputes, there is already a long line of judicial and statutory precedence that exists to assist a taxpayer in understanding whether the IRS is more or less likely to characterize its intercompany instrument as debt or equity. Despite this precedence, given the subjective nature of applying these factors, as well as changing terms appearing in instruments over time, the takeaway should be that while it may be true that a comprehensive debt-equity analysis and documentation of that analysis prior to entering into a intercompany debt transaction may not provide certainty given the patchwork of precedent and multiple factors subject to judicial interpretation that currently exist, it is worth the time and effort to make that analysis. Therefore, for a CFO or senior tax officer of a multinational, conducting a robust debt equity analysis upfront can go a long way to establishing the facts and intent around the debt instrument in question, while taking the many factors discussed above into account. It may be just enough to keep your company from engaging in costly audit defense or litigation down the road.

Kristina Dautrich Reynolds Senior Director, Washington D.C. +1 202 688 4222

Phil Antoon, Managing Director, Gwayne Lai, Senior Director, and Nicole Mahoney, Senior Associate, contributed to this article. 

For More Information:

Juan Carlos Ferrucho Managing Director, Miami +1 305 704 6670

Albert Liguori Managing Director, New York +1 212 763 1638

Jeff Olin Managing Director, Chicago +1 312 601 4240

Other Related Issues

08/06/2013 Intercompany Debt  —  How Much Is Reasonable?

02/17/2009 Financing U.S. Affiliates of Foreign Enterprises: Summary of Relevant U.S. Federal Income Tax Rules and Recent Developments

11/23/2006 Financing U.S. Operations

As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer. 

The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand

Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

To learn more, visit  www.alvarezandmarsal.com  or  www.taxand.com

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Consolidated Financial Statements: Process and Tools

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Intercompany Reconciliation Guide With Examples

Multi-entity organizations have a unique accounting challenge that other companies don’t face; intercompany transactions. So, in addition to traditional account reconciliation, multi-entity accounting teams also have to perform intercompany reconciliation (ICR) to verify all of the transactions among affiliates of the parent company.

In this post, we’ll discuss what intercompany reconciliation is, examples of intercompany reconciliation, the manual intercompany reconciliation process, and how to automate the process.  

What Is Intercompany Reconciliation?

Intercompany reconciliation is the process of verifying the transactions that occur between various legal entities owned by a single parent company.

It is very similar to standard account reconciliation, though instead of matching the company’s general ledger to a bank’s statement, the accountant reconciles transactions between the company’s various entities.  

This is important because it ensures there aren’t any discrepancies in the data and helps avoid double entries across multiple subsidiaries.

While you can manually reconcile the various entities in your company, plenty of automation solutions are also available. We’ll discuss both the manual process and automated solutions below.

Intercompany Reconciliation Process

If there are only one or two small entities within the parent company, you probably won’t have too many intercompany transactions and can perform the reconciliation process either monthly or quarterly. Therefore, you might be able to perform intercompany reconciliation manually. 

The first step to manually reconciling your accounting processes is to ensure that you accurately identify all intercompany transactions in each entity’s balance sheet and income statement.

To make this process easier for yourself, use the same identification and data entry standards for all journal entries involved in intercompany transactions. Ideally, all entities within the parent company use consistent data entry standards, though, at the very least, the journal entries for intercompany transactions should be consistent.

From there, you can choose one of three different processes to execute the intercompany reconciliation process:

• G/L Open Items Reconciliation (Process 001): For the reconciliation of open items
• G/L Account Reconciliation (Process 002): For reconciling profit/loss accounts or documents on accounts that don’t have open time management. 
• Customer/Vendor Open Items Reconciliation (Process 003): Used for most accounts payable and accounts receivables attached to customer or vendor accounts.

As you can see, manually consolidating entries is time-consuming and can slow down your monthly close process. In addition, it’s also risky. As the month-end draws near, your accountants will feel the pressure to finish the reconciliation process which can lead to errors in the data.

For this reason, we recommend that all companies invest in software to automate the process.

An Example of Intercompany Reconciliation (Automated)

Smaller multi-entity companies can theoretically get away with manually performing intercompany reconciliations in spreadsheets. However, larger corporations that deal with thousands or even millions of intercompany transactions execute the reconciliation process daily and therefore have to invest in automation software. 

While various software solutions offer intercompany reconciliation automation, we built SoftLedger because we couldn’t find a solution designed specifically to solve the challenges multi-entity companies face.

We’re particularly proud of it because it automates the entire intercompany accounting and consolidation process. Here’s a brief overview of how SoftLedger handles multi-entity transactions and automates the intercompany reconciliation process:

As you can see, as soon as a transaction for a single subsidiary enters the platform, SoftLedger automatically creates the corresponding journal entries for each intercompany transaction. It also performs any necessary intercompany eliminations and performs the reconciliation process for you.

This way, you always have access to real-time data and never have to worry about manual errors creeping into your consolidated financial statements.

It also makes it easier for you to close the books faster and improves the overall efficiency of your team’s workflow. 

However, there are also a few other key benefits of SoftLedger that make it unique from other traditional ERP systems. 

First, the platform is 100% programmable via API, making it easy to build just about any integration. This also makes it highly flexible, so you can build out your own customizations to fit specific needs. 

It is also the first accounting platform to offer native cryptocurrency capabilities. So rather than purchasing an add-on to integrate your crypto financial data with your fiat financial data, SoftLedger seamlessly combines the two.

As you perform the intercompany reconciliation process, there are probably a few other terms that you’ll hear as well. We’ll discuss these terms below.

Intercompany Payables

An intercompany payable is when a subsidiary in your company owes a payment (like a credit, loan, or advance) to another subsidiary in the parent company. In this case, the company that records the payable consumed the resources provided by the other subsidiary. 

That being said, intercompany payables are ultimately eliminated in the final consolidated balance sheet to avoid inflating the company’s financial data.

Intercompany Receivables

Intercompany receivables occur when one subsidiary provides resources to another subsidiary in the parent company. In this case, the subsidiary providing the resources records the intercompany receivable. 

Like intercompany payables, all intercompany receivables ultimately need to be eliminated in the final consolidated financial statement.

Intercompany Reconciliation Automation Software

While you can theoretically perform the intercompany reconciliation process manually, it’s time-consuming and can slow down the monthly close process.

In addition to creating an operational drag, this delay also means that executives won’t have accurate data for decision-making, leading to poor investment decisions.

To solve this problem, we built SoftLedger, which automates the intercompany reconciliation process.

Designed specifically for multi-entity companies, your team will always have access to real-time data, which makes it easy to close the month faster and improves data accuracy by minimizing the opportunity for human error.

To see for yourself how SoftLedger can streamline your accounting operations and improve efficiency, schedule a demo today !

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Nine preliminary questions when considering intercompany loan agreements

Intercompany Agreements

23 October 2023

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How to scope out intercompany agreements that deal with loans and indebtedness.

Many thanks to everyone who gave us positive feedback about our recent thoughts on intercompany debt . I've been thinking about that subject a lot recently, as I'm in the process of updating our book 'Intercompany Agreements for Transfer Pricing Compliance – A Practical Guide’, and over the last few days I've been working on the chapter on loans and indebtedness between associated enterprises in a multinational group.

It includes a section called 'Preliminary considerations: initial questions regarding the fact pattern', and I thought you might like to see a summary of that here. It lists nine fundamental areas that should be considered before preparing or reviewing an intercompany loan agreement or associated document. They are:

1. Participating entities and structure of debt. Is the intention to document a single loan, a series of loans between the same lender and borrower, or multiple loans between different parties? (If you can standardise the legal form and commercial terms of intercompany debt across the group, it will be easier to maintain the relevant documentation.)

2. New debt vs existing debt. Have the relevant loans already been advanced, or have the debt obligations already arisen? If so, what are the existing terms of the debt, and what documentation already exists? The purpose and commercial rationale for changing the terms of existing debt will need to be clarified and documented.

3. Regulatory considerations. Are any of the relevant entities subject to particular regulatory requirements? For example, regulated entities within the financial services sector may be subject to specific requirements as regards regulatory capital.

4. Solvency considerations. Are any of the participating entities subject to solvency concerns? Examples may include entities with negative net assets or negative reserves. (Such situations may give rise to additional accounting issues and enhanced personal liability risks for director.)

5. Third party creditors and security interests. What third party creditors does the borrower have (or is it likely to have), and are those creditors likely to be secured? Such arrangements will affect the lender’s and the borrower’s risk, and may also provide a constraint as regards the form and substance of the intercompany arrangements which may be put in place.

6. Other legal constraints. Are there any other legal constraints which may restrict the ability of any of the entities to participate in the arrangements? This includes constraints which affect the lender’s ability to lend, or the borrower’s ability to borrow. Examples may include covenants given in the context of third party loan facilities or government grants received.

7. Security. Is it appropriate for security to be provided by or on behalf of the borrower? This may be in the form of a charge over assets or a guarantee provided by an entity other than the borrower. The presence or absence of such security can be a key comparability factor, and a key part of the economic analysis of the arrangement.

8. Legal form of the debt. Are any non-transfer pricing considerations likely to apply which may require the debt to be documented in a particular legal form?

9. Purpose and commercial rationale. What is the purpose of the loan (or the proposed modification to existing arrangements), and why does the form and substance of the transaction make sense from the individual perspectives of each participating entity?

This last question is arguably the most important, from both a legal and a transfer pricing perspective. It relates to many other issues, including the business strategy to be followed by the borrower; from the lender’s perspective, the risks relating to the loan and assumptions as regards the cashflows and assets; and, from the borrower’s perspective, its ability to service the debt and meet its obligations as regards payment of the principal repayment obligations.

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Spotlight On…Intercompany Loans

Intercompany balances frequently build up between members of a group, often without formal documentation

It’s important to think about the tax consequences, otherwise a simple group transaction can lead to a nasty tax charge

Groups often want to tidy up their intercompany balances, particularly prior to a sale of a subsidiary or as part of a group reorganisation.

It’s easy to assume that a transaction between two group members will be tax neutral – but if you get it wrong, tax charges can be a significant cost. However, with a bit of advance planning, any problems can usually be solved.

This is relevant for all companies that are part of a group and have intercompany balances.

Where there is a formal intra-group loan, this will be a ‘loan relationship’ and specific tax rules set out how any profits or losses will be taxed. Provided borrower and lender are part of the same group, a loan waiver will not be taxed for the borrower (and the lender will not get a tax deduction).

Where the balance is a historical one, it is important to identify whether it is a ‘loan relationship’ or arises from some other transaction. A loan relationship is a transaction which relates to the lending of money; other transactions include the sale of goods or services, or outstanding payments for management fees.

A waiver of a trading balance can still be tax free for the borrower, but it’s important to have a formal release, supported by a deed of waiver – otherwise a tax charge could arise.

What should you do next?

Review the intercompany balances within the group and ensure that you know their history and background. If the balances are old and unidentified, sort out the position by making a formal loan so that the old balances can be repaid and replaced by a new loan relationship, and the tax treatment in future will be clear.

Also watch out for balances between companies who are not part of the same group – the rules are different, and there are particular pitfalls if two companies become related after the lender has made a bad debt provision.

There are some specific reliefs for companies in financial difficulties, but you need to make sure that you satisfy all the conditions in order to get the relief.

Would you like to know more?

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If you would like to discuss any of the above guidance, please get in touch with your usual Blick Rothenberg contact.

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• TAX MATTERS

Resolving intercompany debt in consolidations

Simplifying the corporate structure often runs into complications..

• C Corporation Income Taxation

Taxpay ers filing consolidated federal returns often look to eliminate legal entities to reduce administrative costs and simplify the corporate structure. One of the first considerations in this process is to determine how intercompany accounts will be resolved. Once balances are netted between members and available cash is used for repayment, it may be necessary to transfer the receivable balances within the group from the holders until they can be contributed to the debtor member in a capital contribution. Although such resolutions are commonly carried out without any overall federal tax impact, there are traps for the unwary, especially when entities being eliminated have experienced financial hardship.

An unintended taxable liquidation

Rev. Rul. 68 - 602 presents one such trap to be avoided before reorganizing a member. In the ruling, parent corporation P and its wholly owned subsidiary S filed a consolidated federal return, and P had loaned funds to S such that S was considered insolvent. To resolve the insolvency and liquidate S in a tax - free manner, P canceled the indebtedness from S , treating the cancellation as a contribution of capital pursuant to Regs. Sec. 1. 61 - 12 . As part of a single plan, S then liquidated into P . However, the ruling held the cancellation of S' s indebtedness to be transitory, integral to the liquidation, and having no independent significance other than to secure for P the historic tax benefits of S' s net operating losses. As Regs. Sec. 1. 332 - 2 (b) requires at least partial payment in exchange for the stock of the liquidating corporation, disregarding the intercompany resolution ultimately meant S was not solvent at the time of the liquidation and therefore did not qualify for Sec. 332 treatment, resulting in a taxable liquidation.

Tax-free status under Rev. Rul. 78-330

Rev. Rul. 78 - 330 may provide an alternative to the Rev. Rul. 68 - 602 problem for certain taxpayers. In this ruling, P wholly owned two subsidiaries, S1 and S2 , and intended to eliminate S2 , a member in a similar situation to that of the subsidiary in Rev. Rul. 68 - 602 . In this case, however, following the intercompany resolution, S2 was then merged sideways with and into S1 in a statutory merger under Sec. 368(a)(1)(A). Unlike in Rev. Rul. 68 - 602 , the debt cancellation was attributed independent economic significance because the deemed contribution genuinely altered the previous debtor - creditor relationship between P and S2 . The ruling appears to offer an out for eliminating a previously insolvent member where a sister member can act as the acquirer.

Merging entities under Rev. Rul. 72-464

The next question is: What happens when brother - sister members combine and have intercompany accounts between them? Although not a consolidated return scenario, Rev. Rul. 72 - 464 involves a situation in which corporation Y intended to merge with and into X in a statutory merger under Sec. 368(a)(1)(A), but at the time of the merger, X held notes issued by Y . The ruling held that when Y merged with and into X , Secs. 357(a) and 361(a) prevented Y from recognizing gain or loss, even where its assets could be viewed as paying off the existing note held by X . While this is good news for Y , an added trap in this ruling is that X was held to recognize gain or loss on the debt extinguishment as a result of market discount on the note ( X purchased the note from a third party for less than its face amount). Although intercompany accounts rarely carry a discount in the hands of the holder, this element of the ruling has to be addressed in a simplification exercise.

Application to third parties

The application of the aforementioned rulings may not be limited to intercompany reorganizations but may also be considered in a third - party sale. Specifically, solvency may be an issue in the context of a deemed asset sale transaction under either Sec. 336(e) or 338(h)(10). In these cases, the "old" target is deemed to liquidate following the hypothetical sale of its assets to "new" target. Even deemed liquidations are governed by Sec. 332, and so the pre - transaction insolvency of the target may require consideration of Rev. Rul. 68 - 602 . This was the case in Chief Counsel Advice 200818005, where, citing Rev. Rul. 68 - 602 and contrasting with Rev. Rul. 78 - 330 , the IRS held a Sec. 332 liquidation did not occur in the context of a deemed asset sale election because the target member's intercompany balances resolved prior to the sale resulted in its solvency.

Many taxpayers expect simplifying the corporate structure to be a benign exercise. While this may be the case, the aforementioned authorities illustrate the importance of assessing the resolution of intercompany balances early in such a project. Careful planning can help taxpayers filing consolidated returns to avoid unexpected tax consequences in an otherwise tax - free transaction.

— By Zach Meyers, CPA, an M&A tax manager with BDO USA LLP in Grand Rapids, Mich.

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U.S. Perspective on Intercompany Cross-Border Loans – Follow Best Practices and Avoid Unintended Consequences

When funds are moved through a corporate group, whether to fund an acquisition or the working capital needs of an affiliate, the transfers may be recorded as book-entry advances and not documented or documented at a later date. That approach may not be advisable for credit and tax reasons, particularly in the case of funds that have been moved cross-border, and may result in the unintended and potentially serious consequences of an intercompany loan being treated as equity or of any collateral for that loan not being legally effective.

U.S. Tax Principles . Practitioners should be aware of some basic U.S. tax law principles that may affect the parties’ characterization of the funds advanced as an intercompany loan for U.S. tax purposes. First, the intent of the parties to treat funds advanced as a loan is a relevant factor for tax purposes, but not the only one. For the parties’ intent to be respected, the loan should be documented, and the terms set forth must be truly indicative of an arms length transaction. The documents should provide for a return based not on earnings of the borrower, but reflecting a commercially reasonable interest rate, with fixed payment dates for principal and interest, and other terms typically found in a loan.

Second, under the U.S. “thin cap” rules, even a well documented loan owing by the U.S. subsidiary can be treated as equity, if the U.S. subsidiary is too thinly capitalized (i.e., too highly leveraged). There is no mathematical formula under U.S. tax law for establishing when a company is too thinly capitalized, although most practitioners suggest a debt-equity ratio of 3:1 or less is likely to be respected. It will depend on the circumstances, such as industry norms and what a third party lender would require.

If debt is re-characterized as equity, any interest paid on the debt will be treated as a non-deductible distribution in contrast to deductible interest and subject to U.S. withholding tax, to the extent of earnings and profits. Withholding tax on dividends by a U.S. subsidiary to its Canadian parent is generally at a 5% rate ( in contrast to withholding tax on interest payments, which was eliminated under the Fifth Protocol to the 1980 Canada U.S. Tax Treaty). However, the earnings stripping rules under Section 163(j) of the Internal Revenue Code should also be considered. These rules may operate to limit the deductibility of interest paid by the U.S. subsidiary to a related party.

Credit Concerns . A parent may have the additional objective of wanting certain funds down-streamed as a loan rather than as equity for the purpose of protecting itself if the U.S. borrower is having or later encounters financial difficulty. However, intercompany advances to an undercapitalized U.S. borrower or that are not properly documented and structured as loans on commercially reasonable terms, not only run an increased risk of being re-characterized as equity for tax purposes, but also may be re-characterized as equity in a bankruptcy proceeding. If an intercompany loan is re-characterized, not only would the parent’s claim drop to the lowest priority in the bankruptcy of the U.S. borrower, but any repayment

received by the parent on that “loan” would be a return of equity that could be attacked as a fraudulent transfer under Section 548 of the U.S. Bankruptcy Code (no fraudulent intent required) and may have to be returned by the parent to the U.S. borrower’s bankruptcy estate. Unfortunately, establishing commercially reasonable terms for a loan may be easier said than done when the borrower is troubled or is incapable of obtaining a loan from a third party, which may result in an unavoidable risk of the loan being re-characterized as equity for both tax and bankruptcy purposes.

Securing an Intercompany Loan . Another way of improving the parent’s position in the event of insolvency of the U.S. subsidiary is to secure any intercompany loan with collateral. Under Section 547 of U.S. Bankruptcy Code, if the collateral to be granted by the U.S. subsidiary is not documented contemporaneously with the advancing of the funds by the parent or all perfection steps (filing of financing statements, recording of mortgages and the like) are not completed at the same time (or within 30 days thereafter), the grant of collateral by the U.S. subsidiary may be subject to being avoided (that is, nullified) and any repayments received by the parent may have to be returned as “ preferences” in any later bankruptcy of the U.S. subsidiary. For an insider, like the parent, this preference risk will continue to exist for a one year period following the date that both the collateral documents have been signed and proper perfection steps have been taken (the “preference period”) (for non-insiders the preference period is only 90 days). Therefore, when it comes to securing an intercompany loan, waiting until there is a problem is unwise.

Best Practices . For the reasons stated above, deferring decisions on how to move funds through a corporate group, or delaying documenting intercompany loans, may affect the desired outcome for tax or credit purposes. Best practices therefore require the parties to:

• Make a decision upfront as to what extent funds will be advanced as a loan, and whether the repayment obligation will be secured by collateral.
• Evidence any intercompany loan by a promissory note or a loan agreement.
• Provide in the promissory note or loan agreement for interest at a reasonable, arm’s length commercial rate.
• Establish a fixed maturity date, if feasible, rather than having the loan be payable on demand.
• Enter into any collateral documents at the same time as the loan is advanced.
• Make sure all necessary perfection steps under U.S. law are taken at the time the collateral is documented and the loan is advanced.
• Cause the borrower to actually make the principal and interest payment on the schedule set out in the promissory note.

Following these best practices will not guarantee any outcome, but should offer material benefit if the characterization of an intercompany loan or the collateral for the loan is challenged.

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Key questions on subordination

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There are different forms and treatments of subordination agreements in Swiss insolvency. This article is inspired by the authors’ experience representing the security agent of $1.75 billion bond issue of a Swiss based oil refinery group

When a group of lenders extends credit to the same borrower, it usually enters into an intercreditor agreement, a key component of which is a subordination provision setting out the ranking and priority of repayment rights. In addition, the subordination of intragroup funding, ie loan agreements between group companies, to the lenders' claims is frequently seen in financing transactions. In Switzerland, subordination agreements also serve as an instrument under company law (article 725 II Swiss Code of Obligations (CO)) that enables over-indebted companies to continue doing business. The subordination clauses as seen in the intercreditor agreements or other debt financing structures on the one hand ( Nachrangigkeit ) and subordination agreements satisfying the requirements of article 725 II CO ( Rangrücktritt ) on the other serve different purposes and need to be carefully distinguished. Although all subordination agreements are concluded with a view to a possible insolvency of the borrower, their effect and enforceability in Swiss insolvency proceedings is only clear if falling under article 725 II CO, whereas the treatment of other contractual subordination is uncertain.

Subordination pursuant to article 725 II CO

Under Swiss corporate law, the board of directors has to take specific measures if the company finds itself in distress. These measures include a duty to notify the bankruptcy court, if a company suffers from a capital deficit to the extent that the claims of the company's creditors are no longer covered, whether the assets are appraised at going concern or liquidation values (over-indebtedness). The board of directors can refrain from notifying the judge, if a creditor subordinates its claims in the amount of the capital deficit to all other liabilities pursuant to article 725 II CO. There is no need for the board of directors to obtain approval from the other creditors or the shareholders. By subordinating their claims, creditors agree that, if insolvency proceedings are opened over the borrower company, dividend distributions will only be paid out to them if and after all other unsubordinated and unsecured claims are satisfied in full.

An agreement to subordinate a claim does not constitute a waiver. The borrower company must continue to account for subordinated claims as liabilities and disclose the subordinated loan separately in the annual financial statements. Accordingly, the subordination itself does not constitute a restructuring measure since the financial situation of the company remains unchanged. However, subordination agreements increase the chances for a distressed company to financially recover as they allow for more time to adopt restructuring measures. Subordinated loans pursuant to article 725 II CO have in practice often been used as de facto equity surrogates for many years, although this is not the intention of the law. It is important to note that the Swiss Federal Supreme Court held that subordinated claims are to be included in the calculation of damage when ruling on a director's liability claim.

The law stipulates that the board of directors can only refrain from notifying the judge if the amount of subordinated claims equals or exceeds the capital deficit. The wording of article 725 II CO does not indicate whether the deficit should be appraised at going concern or liquidation values for the purposes of determining the necessary subordination amount. The question is controversially discussed. Some authors argue that in addition to the capital deficit the subordination amount should cover at least part of the share capital. A 2003 judgment of the Swiss Federal Supreme Court dealing with the termination of a subordination agreement, indicates that it is admissible to appraise assets at going concern value if the company is expected to overcome the state of over-indebtedness. If this is not the case, for example due to the company's liquidity problems, accounting on a going concern basis is no longer permitted. In such a case, the extent of the subordination of claims required needs to be calculated at liquidation values, which usually makes restructuring impossible. The going concern statement of the auditors is paying an important role in the termination of the subordination and any restructurings.

Legal doctrine and case law have determined that any subordination agreement needs to include a deferral agreement, at least with regards to the principal amount of the loan, as well as a prohibition for the borrower to repay or set off the subordinated liabilities. If it were possible to satisfy the subordinated creditor before insolvency, this would jeopardise the purpose of article 725 II CO to improve the borrower's financial situation, and the position of the other unsubordinated and unsecured creditors. The declaration to subordinate must further be irrevocable, unconditional and unlimited in time (although termination is possible under the requirements explained below) to meet the requirements of article 725 II CO. Finally, the claim covered by subordination may not be collateralised with assets of the borrower.

The subordination agreement can only be terminated once the borrower company is no longer over-indebted, which may be assessed on a going concern basis. Until then, the subordination agreement remains effective, according to the Federal Supreme Court.

Subordination agreements in debt financing – relative subordination

In addition to the subordination pursuant to article 725 II CO, which constitutes a company law instrument and may enable restructuring measures, subordination agreements can serve to secure the payment of debt owed to one or more specific creditors and are most commonly used in the context of financing transactions. Since the subordination according to article 725 II CO benefits all other creditors, it is often referred to as general subordination. This is in contrast to the subordination agreements intended to benefit only specific lenders, ie provide for relative subordination. If the subordination is not intended to have the effect of article 725 II CO, it does not have to fulfil the requirements described above. In most cases though, a subordination agreement will contain a deferral as well as a prohibition of repayment or set off, to ensure the intended effect of the subordination. In addition, the subordinated creditor might assign its claim to the senior creditor. However, such assignment of the subordinated claim is not mandatory to give effect to the relative subordination.

Subordination provisions in intercreditor agreements

Intercreditor agreements determine the ranking between the lenders of a syndicated loan including provisions on payment seniority, security interest priority and contractual subordination (payment waterfall or application of proceeds).

The basic premise of intercreditor agreements including mezzanine and senior debt financings is that mezzanine debt is subordinated in right of payment to senior debt. The borrower is usually blocked from paying the mezzanine debt and the mezzanine creditors are prohibited from exercising remedies against the borrower. The intercreditor agreement may also contain a provision, by which the mezzanine creditor is required to turn over any amounts they receive but are not entitled to under the intercreditor agreement, to the agent for application in accordance with the payment waterfall. As it is generally the agent's responsibility to receive payments from the borrower and distribute them to the parties in accordance with the intercreditor agreement, the enforceability of such subordination provisions in Swiss insolvency proceedings (namely their consideration ex officio by liquidators), is of limited relevance.

Subordination of intercompany loans

If a company requires capital beyond what they are able or wish to obtain through the standard syndicated loan they may enter into an additional financing transaction. A company may combine a syndicated loan with a high yield bond. In simplified terms, such a structure might look as follows (see illustration above): a group of companies, ie their holding company X Holding AG, receives financing from a bank syndicate under a credit facility. In addition, the group's finance company, X Ltd, as an example, issues bonds at a later stage, the proceeds of which are distributed within the group through various intercompany claims. Normally, all of the group's assets are assigned as collateral to the bank syndicate – with the exception of the intercompany loans. These intercompany claims remain the only asset available to provide security for the bondholders. Intercompany claims are frequently not assigned to the bank syndicate because re-assignment for restructuring purposes requires the consent of all, or at least the majority, of banks. For the same reasons, the assignment as security of all intercompany claims in favour of the bondholders is not desirable from the borrower's perspective. In our example, a couple of intercompany loans into the same group company – X AG – are assigned as security to the bondholder agent and constitute the senior claim of the bondholders into X AG. In addition, some group companies agree to subordinate their (current and future) intercompany claims against that same company, X AG, in favour of the senior claim, to prevent that additional intercompany indebtedness of X AG impair the value of the bondholders' security, ie the senior claim, in the event of insolvency.

The relevant missing element, if intercompany loans are subordinated to secure the obligation under a separate second financing transaction, is that there is no intercreditor agreement between the subordinated intra-group companies and the senior lenders of the second financing transaction.

Enforcement of subordination in Swiss insolvency proceedings

Subordination agreements are subject to the choice of law. If insolvency proceedings, ie bankruptcy or composition proceedings, are opened over a company domiciled in Switzerland, these proceedings are governed by Swiss law. Therefore, if the question arises as to whether a subordination agreement is valid and how it is to be qualified, foreign law may apply – often English law. The question of how subordinated claims are to be dealt with in Swiss insolvency proceedings is governed by Swiss law, namely the Swiss Debt Enforcement and Bankruptcy Law (DEBL).

Creditor rankings in Swiss insolvency proceedings

In Swiss insolvency proceedings, all claims are ranked as follows:

Estate claims ( Masseverbindlichkeiten ) consist of claims arising out of transactions entered into after the opening of insolvency proceedings as well as the costs of conducting the proceedings and are satisfied with priority before any distributions are made to other creditors.

Secured claims ( pfandgesicherte Forderungen ) are satisfied on a priority basis from the proceeds of the disposal of the security. If these proceeds are not sufficient to satisfy the entire secured claim, the uncovered amount ranks as unsecured claim.

Unsecured claims are divided into three classes:

The first class of claims mainly consists of claims arising from employment relationships.

The second class encompasses claims from social security.

The third class comprises all other unsecured and unsubordinated claims.

Dividend distributions are made according to the creditors' ranking. Claims in a lower ranking class will only receive dividend payments if all claims in a higher ranking class have been satisfied in full. If the insolvency estate does not have enough funds to cover all claims in one class, the proceeds are distributed to the creditors of that class on a pro rata basis according to the claim amounts. The division of unsecured creditors into three classes is binding for the liquidators. A contractual subordination, by which a creditor agrees to have his claim satisfied only after specific or all other claims are satisfied needs to be dealt within the legal ranking system of the DEBL.

Enforcement of subordination pursuant to article 725 II CO

In prevailing doctrine there is a consent that the liquidators in a bankruptcy or composition proceeding have to enforce a subordination pursuant to article 725 II CO ex officio. Generally, the liquidator admits or rejects a creditor's claim in a schedule of claims and accordingly prepares a distribution plan. Although the effect of a subordination agreement will not materialise before the stage of dividend distribution, as it can only then be determined whether the claims of the beneficiaries will be fully satisfied, the liquidators have to include their decision on the admittance of the subordinated claim and the validity of the subordination agreement in the schedule of claims. If the subordination is accepted by the liquidators, the subordinated creditor only receives dividend distributions, if there are sufficient funds in the insolvency estate to satisfy the claims of the beneficiaries. In the case of a subordination agreement pursuant to article 725 II CO, all other unsubordinated creditors will benefit from the subordination – the subordinated creditor will in most cases not receive any distributions.

Enforcement of relative subordination

Whether a liquidator also has to consider a subordination agreement which only benefits specific creditors (relative subordination) ex officio is controversially discussed. Some authors and liquidators argue that a claim which is relatively subordinated, should be admitted in the schedule of claims like a normal claim and dividend payments made to the subordinated creditor. According to prevailing opinion, however, relative subordination should be enforced by the liquidator just like subordination pursuant to article 725 II CO. In this case, the dividend accruing to the subordinated creditor would not be paid out to the subordinated creditor but directly to the senior creditor (in addition to the senior creditor's own dividend) until the senior claim was paid in full. After the senior creditor has been paid, the remainder of the subordinated creditor's dividend would be paid toward the subordinated creditor's own claim.

This discussion also becomes relevant if parties have to enforce the subordination agreement in court. If the subordination is to be admitted or rejected in the schedule of claims ex officio, any disagreement between the parties about its validity or its extent must be settled by means of an action to contest the schedule of claims. Such litigation takes place in Switzerland, where insolvency proceedings were commenced. If on the contrary, the liquidator does not have to take the subordination into account, the senior creditor would have to file an action against the subordinated creditor to turn over dividend distributions, ie a normal action for payment outside insolvency proceedings.

In cases where the subordination has been agreed to in an intercreditor agreement, the senior creditors are not as dependent on the liquidator to decide on the subordination in the schedule of claims. If the liquidators ignore the relative subordination and make distributions to the subordinated creditor, the latter would have to turn over such distributions to the agent for application of proceeds. Hence, the senior creditors may assert their claims under the subordination clause against the subordinated creditor or the agent.

The situation is different if a company raises funds through two separate financing transactions, and intercompany loans (or other claims) are subordinated to secure repayment of the second transaction. As explained, in such structures the senior creditors are not party to an intercreditor agreement and thus cannot rely on an agent to apply proceeds according to a waterfall provision. Further, in most cases the entire group of companies becomes insolvent, thus not only the borrower but also the subordinated creditors. If the Swiss liquidator does not have to decide on the relative subordination ex officio , the bondholders would potentially have to initiate separate litigation against all the subordinated creditors in their respective jurisdictions. Although the subordination agreement will usually contain a jurisdiction clause, claims against insolvent subordinated creditors have to be filed where they were domiciled. This would increase the risk of conflicting interpretations of the subordination agreement by the respective courts, while coordination in Switzerland in the context of the same insolvency proceedings would be much simpler and more practical.

In case of insolvency of the whole group, there is also a risk of claim dilution should the subordination not be enforced by the liquidator and the senior creditor not be able to rely on an intercreditor agreement (see illustration below). If the subordinated creditor becomes insolvent as well, the senior creditor will have to file their claim for turnover of dividends paid to the subordinated creditor by the borrower as an insolvency claim. Should the senior creditor prevail, they can only expect a (further) dividend payment from the insolvency estate of the subordinated creditor. That dividend payment will be calculated on the basis of the dividend the subordinated creditor received from the borrower's insolvency estate. Thus, senior creditors can only expect to receive a dividend on the dividend.

As of today, Swiss courts have not had the opportunity to address the question of whether a liquidator is under an obligation to take into account an agreement providing for relative subordination to the benefit of specific creditors. As long as the Swiss Federal Supreme Court has not issued a judgment in this respect, the enforceability of a relative subordination agreement, as often used in financing transactions, in Swiss insolvency proceedings is uncertain. In addition, it is controversially discussed whether the senior creditor has a right to file the subordinated claim in the insolvency proceedings on behalf of the subordinated creditor. Some authors oppose this view, arguing that the senior creditor is only left with a compensation claim against the subordinated creditor, should the latter refrain from filing his claim. For all these reasons, alternative mechanisms to a relative subordination should be considered in transactions involving Swiss companies.

The benefits of a relative subordination might be achieved through an assignment of the claim by way of security. The enforceability of a security assignment in insolvency proceedings is undisputed and has been confirmed by the Swiss Federal Supreme Court. In addition, the assignee is not dependent on the assignor to actually file the claim, as they himself become the claimant. As explained above, with respect to intercompany claims an assignment is generally avoided deliberately, as this restricts a group's future restructuring possibilities and the work of the finance department. To avoid this, the effectiveness of the assignment could be made conditional upon the insolvency of the borrower. As there is an increased risk in an intra-group context, that the subordinated creditor become insolvent around the same time as the borrower, parties should bear in mind the risk of claw-back actions in the insolvency of the subordinated debtor.

Given the important role subordination agreements play in the context of financing transactions, the enforceability of not only general but also relative subordination in Swiss insolvency proceedings would be desirable, in order to not restrict their use. The relevance of this discussion is limited in standardised transactions including an intercreditor agreement, as the subordination can be enforced by means of the agent. However, the relative subordination of intercompany loans is also a common structuring possibility in financing transaction. In these cases, senior creditors need to rely on the liquidator to enforce the payment waterfall or might face proceedings in several jurisdictions and risk a dilution of their claims, if the subordinated creditor became insolvent as well. Until the Swiss Federal Supreme Court decides the matter, this useful tool should be employed with caution. A conditioned security assignment as described above should be considered in addition to a subordination agreement.

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Intercompany Subordination Agreement

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What is an intercompany subordination agreement.

An intercompany subordination agreement is a contract between a lending and borrowing company that says that the lending company be paid back before other lenders. Once signed, the agreement designates the lending company's investment in the borrower's company into senior debt. When the borrowing company has insufficient funds to repay all of their outstanding debt, the lending party on the intercompany subordination agreement must be paid back first per the terms of the contract.

The purpose of this agreement is to provide an additional layer of protection to the lending company against not recovering their investment.

Common Sections in Intercompany Subordination Agreements

Below is a list of common sections included in Intercompany Subordination Agreements. These sections are linked to the below sample agreement for you to explore.

Intercompany Subordination Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.3 4 dex103.htm INTERCOMPANY SUBORDINATION AGREEMENT , Viewed September 16, 2022, View Source on SEC .

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www.parachinilaw.com I represent a diverse mix in a vast array of specialties, including litigation, contracts, compliance, business and financial strategies, and emerging industries. Credit for this foundation of strength goes to those who taught me. Skilled professors and professionals fostered my powerful educational and professional background. Prior to law school, I earned dual Bachelor’s degrees in Business Administration & Accounting from Peru State College. I received a Master of Business Administration degree from Chadron State College. My ambitions did not stop there. While working full time as a Senior Accountant for the University of Missouri, Columbia, I achieved the lifelong goal of becoming a licensed Certified Public Accountant (CPA). Mizzo provided excellent opportunities and amazing experiences. Managing over $50M in government and private research funding was a gift. As a high ranking professional in the Department of Research, I was given priceless insight into the greatest scientific, journalistic, medical, and legal minds in the world. My passion for successful growth did not, and has not stopped. I graduated summa cum laude (top 3%) with a Doctorate in Law, emphasizing in urban, land use and environmental/toxic tort law from the University of Missouri, Kansas City. This success lead to invaluable experiences of serving as Hon. Brian C. Wimes' judicial clerk for the U.S. District Court for the W. D. of Missouri, as a staff editor/writer for UMKC Law Review, and as a litigation and transactional attorney with Lathrop GPM (fka Lathrop & Gage). My professional and personal network is expansive, with established relationships throughout the U.S. and overseas. Although I engage in legal practice all over the country, I maintain law licenses in Missouri, Kansas, and Nebraska. Federally, I hold licenses in the W.D. and E.D. of Missouri and the District of Nebraska. To offer extra value, efficiency, and options, I maintain a CPA license and am obtaining a real-estate brokerage license.

As a multilingual attorney, Rudy Cohen-Zardi holds multiple degrees from several institutions worldwide. He has gained experience in leading firms, including Eversheds Sutherland, LLP and Bank of China (NY). He is licensed to practice in New York. His practice focuses on bankruptcy, corporate, and contracts law.

I am a graduate from Wittenberg University and University of Illinois at Urbana-Champaign. I have been admitted to the Indiana bar since 2013. I have collaborated on several writing projects for the Indiana State Bar.

During my tenure as VP & Division General Counsel of PepsiCo Inc. in Chicago, I built upon my diverse career overseeing legal matters for both the domestic and international businesses of PepsiCo and The Quaker Oats Co. My extensive practice areas included M&A, contracts, competition, NDAs, regulatory compliance, consumer product & protection, environmental, patents, and advertising regulations. Throughout my professional journey, I navigated legal complexities associated with an eclectic range of products, spanning juices, sports drinks, cereals, snacks, needlepoint kits, canned goods, eyeglasses, men's suits, car seats and toys. For further information, see my LinkedIn: http://linkedin.com/in/karen-hunter-a700179

I am a business lawyer with 30+ years of experience, with a specialization in the life sciences industry. I have been general counsel at 5 different companies - both large and growing, as well as small and emerging. I have built legal teams and have extensive experience with Boards of Directors.

Greene Litigation Group, PLLC., specializes in Personal Injury, Criminal Defense, Contract Dispute, Wills & POAs, Irreconcilable Differences Divorce, Business Formation, Contract Drafting, and Landlord Tenant Law

After a career in aviation, I went to Albany Law School graduating in 2003. I opened my own practice in 2005 following a 2-year term with a large, Albany-based law firm. I focus my practice on helping individuals and small business with various matters including defense representation, family law/matrimonial matters, estate planning, probate and estate administration, bankruptcy, business formation and general litigation.

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Assignment, novation or sub-participation of loans             

Transfers of loan portfolios between lending institutions have always been commonplace in the financial market.  A number of factors may come into play – some lenders may wish to lower their risks and proportion of bad debts in their balance sheets; some may undergo restructuring or divest their investment portfolios elsewhere, to name a few.  The real estate market in particular has been affected by the announcement of the “three red lines” policy by the People’s Bank of China in 2020 which led to a surge of transfers, or attempted transfers, of non-performing loans.  Other contributing factors include the continuous effects of the Sino-US trade war and the Covid-19 pandemic.

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Transferability of Loans

The legal analysis regarding the transferability of loans can be complex.  The loan agreement should be examined with a view to identifying any restrictions on transferability of the loan between lenders, such as prior consent of the debtor and, in some cases, whether such consent may be withheld.  Other general restrictions may apply given that most banks have internal confidentiality rules and data protection requirements, the latter of which may also be subject to governmental regulations.  Certain jurisdictions may restrict the transfer of loans relating to specific types of receivables – mortgage or consumer loans being prime examples.  It is imperative to conduct proper due diligence on the documentation and underlying assets in order to be satisfied with the transferability of the relevant loans.  This may be complicated further if there are multiple projects, facility lines or debtors.  It is indeed common to see a partial transfer of loans to an incoming lender or groups of lenders.

Methods of Transfer

The transfer of loans may be carried out in different ways and often involves assignment, novation or sub-participation.

A typical assignment amounts to the transfer of the rights of the lender (assignor) under the loan documentation to another lender (assignee), whereby the assignee takes on the assignor’s rights, such as the right to receive payment of principal and interest on the loan.  The assignor is still required to perform any obligations under the loan documentation.  Therefore, there is no need to terminate the loan documentation and, unless the loan documentation stipulates otherwise, there is no need to obtain the debtor’s consent, but notice of the assignment must be served on the debtor.  However, many debtors are in fact involved in the negotiation stage, where the parties would also take the opportunity to vary the terms of the facility and security arrangement.

Novation of a loan requires that the debtor, the existing lender (transferor) and the incoming lender (transferee) enter into new documentation which provides that the rights and obligations of the transferor will be novated to the transferee.  The transferee replaces the transferor in the loan facility and the transferor is completely discharged from all of its rights and obligations.  This method of transfer does require the prior consent of the relevant debtor.

Sub-participation is often used where a lender, whilst wishing to share the risks of certain loans, nonetheless prefers to maintain the status quo.  There is no change to the loan documentation – the lender simply sells all or part of the loan portfolio to another lender or lenders.  From the debtor’s perspective, nothing has changed and, in principle, there is no need to obtain the debtor’s consent or serve notice on the debtor.  This method of transfer is sometimes preferred if the existing lender is keen to maintain a business relationship with the debtor, or where seeking consent from the debtor or notifying the debtor of any transfer is not feasible or desirable.  In any case, there would be no change to the balance sheet treatment of the existing lender.

Offshore Security Arrangements

The transfer of a loan in a cross-border transaction often involves an offshore security package.  A potential purchaser will need to conduct due diligence on the risks relating to such security.  From a legal perspective, the security documents require close scrutiny to confirm their legality, validity and enforceability, including the nature and status of the assets involved.  Apart from transferability generally, the documents would reveal whether any consent is required.  A lender should seek full analysis on the risks relating to enforcement of security, which may well be complicated by the involvement of various jurisdictions for potential enforcement actions.

A key aspect to the enforcement consideration is whether a particular jurisdiction requires that any particular steps be taken to perfect a security interest relating to the loan portfolio (if the concept of perfection applies at all) and, if so, whether any applicable filing or registration has been made to perfect the security interest and, more importantly, whether there exists any prior or subsequent competing security interest over all or part of the same assets.  For example, security interests may be registered in public records of the security provider maintained by the companies registry in Bermuda or the British Virgin Islands for the purpose of obtaining priority over competing interests under the applicable law.  The internal register of charges of the security provider registered in the Cayman Islands, Bermuda or the British Virgin Islands should also be examined as part of the due diligence process.  Particular care should be taken where the relevant assets require additional filings under the laws of the relevant jurisdictions, notable examples of such assets being real property, vessels and aircraft.  Suites of documents held in escrow pending a potential default under the loan documentation should also be checked as they would be used by the lender or security agent to facilitate enforcement of security when the debtor defaults on the loan.

Due Diligence and Beyond

Legal due diligence on the loan documentation and security package is an integral part of the assessment undertaken by a lender of the risks of purchasing certain loan portfolios, regardless of whether the transfer is to be made by way of an assignment, novation or sub-participation.  Whilst the choice of method of transfer is often a commercial decision, enforceability of security interests over underlying assets is the primary consideration in reviewing sufficiency of the security package in any proposed loan transfer.

Hong Kong , Shanghai , British Virgin Islands , Cayman Islands , Bermuda

Banking & Asset Finance , Corporate

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