Intra-Company Debts in a Group Re-organisation

22 Oct 2025

By Louis Frances, Trainee Solicitor, Corporate, Gilson Gray

During group re-organisations, whether by way of merger, demerger, group simplification or restructuring, intra-company debts are a matter that frequently needs attention.

These debts represent financial obligations between group companies and typically come in the form of:

• Intercompany Loans (these are often positioned as cash advances from one group company to another, typically on an interest free basis);
• Management Charges or Service Fees (charges for shared resources or services such as overhead costs and office facilities); and
• Trading Balances (inter-company supply of goods or services on credit terms).

While these arrangements are common in the ordinary course of business, their treatment in a reorganisation raises legal considerations that need to be addressed. Without taking the necessary steps, these debts usually remain enforceable obligations unless discharged.

How can intra-company debts be treated?

Set-off and Netting

Set-off and netting is where companies (within a group structure) set-off debts that are due by one group company to another. A “set-off” of the debt may be applied to reduce reciprocal liabilities and it is not unusual for contractual set-off provisions to be included in intercompany loan agreements between various group companies.

Debt Waivers and Releases

As part of a restructuring, a parent / holding company may waive debts owed by a subsidiary to either (i) clean up the balance sheet or (ii) to prepare for a sale. Such releases can be done legally but it is important to consider the provisions of the Companies Act 2006.

For example, a waiver may constitute a “distribution” under the Companies Act 2006 if the waiver confers value on the shareholders (even though this may occur indirectly). Directors must further consider their fiduciary duties under the Companies Act 2006 which confers (amongst others) the obligation of the directors to act within their powers and to act in the best interest and promote the success of the company.

Capitalisation of Intra-Group Loans

A common technique in reorganisations is to convert intercompany debt into equity by converting the debt at an agreed share price and issuing shares in satisfaction of the debt. This may also be an attractive option of group companies from a tax and accounting perspective.

In order to do this, there are various requirements to take into consideration both from (i) the perspective of any restrictions or procedural matters found in an existing shareholders agreement and / or the company’s articles of association, and (ii) compliance with statutory requirements under the Companies Act 2006 in relation to the allotment of shares and consideration for shares.

Assignation or Novation

Intra-company debts may also be assigned or novated within a group. If an assignation of the debt was to occur, the creditor can assign the debt to another group company. Once the assignation has been intimated on the debtor, the assignee essentially steps into the shoes of the previous creditor and takes on the rights of the previous creditor.

If there is a novation of the debt, the original debt is extinguished and replaced with a new debt owed to the new creditor or owed by a new debtor. However, for a novation to take place all three parties (creditor, debtor and new creditor / debtor) must consent to the novation. As a novation would create a new contract and discharge the previous debt, the new party’s rights and obligations are free from any equities arising under the old debt.

What about Insolvency?

If one of the group companies enters voluntary insolvency during or after a reorganisation, intra-company debts take on heightened importance and should consider the following:

1. Any debt owned by a subsidiary to a parent or sister company is a “provable debt”. This means that unless that debt is “secured” by the parent or the sister, the debt will rank as an ordinary unsecured debt that ranks equally with external creditors.
2. The concept of set-off will be used if a subsidiary owes money to a parent and vice versa. This means that the debt is “set-off” and only the net balance of the debt is provable and payable.
3. The risk of legal challenges also comes into play. For example, repayment of a group debt before insolvency may be challenged if it puts the parent of another group creditor in a more favourable position than others and the company was influenced by the desire to prefer. Furthermore, if a subsidiary advanced funds to its parent without the proper consideration of the board of directors and/or shareholders, liquidators may argue that this was an unlawful distribution of capital.

Summary

Despite the significant legal, accounting and tax consequences, intra-company debts are often overlooked in the planning and execution of the re-organisation and it is, therefore, vital that you seek legal and tax advice in regards to these debts. Their proper treatment requires careful structuring of balancing internal constitutional documentation, statutory requirements under the Companies Act 2006, insolvency law protections and the commercial objectives that are ultimately driving the re-organisation.

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