Mr A and Mr B were equal shareholders in Co D which was sold some years ago. Co D had lent some money to Co. E but on the sale of Co. D the loans of face value £300k were assigned equally to Mr A and Mr B at a 40% discount to their face value ie £180k as Co E was in deficit trying to establish a new product at the time and the loans had a risk of not being recoverable in full. Mr A and Mr B are minority shareholders in Co E.
Co E recently tidied up its balance sheet by issuing 100k new "A" ord shares at £1 par value to each of Mr A and Mr B with the subscription price satisfied by the discharge of £100k of loans each repayable to them. The other shareholders signed waivers of pre-emption rights in respect of the issue of new "A" ord shares to Mr A and Mr B.
The "A" shares are restricted to £1 par value per share on a liquidation or on change of control of Co E, therefore likely to realise similar to the loans capitalised.
Queries:
1. Is there a capital gain to Mr A and Mr B as they are not the original lenders ? If so what wold the proceeds be - the £100k being the amount of loan discharged for equivalent sum of "A" ord shares at par value or is it the market value of the shares at the time the loans were capitalised ?
2. Can there be said to be a deemed share reorganisation with only letters for application and allotment of shares with shareholder loans being capitalised, such that no disoposal ?
3. Is there a conversion of securities under s132 TCGA such that no disposal ?
The loans capitalised originally were evidenced under a standard loan agreement between Co D and Co E and with a subsequent assignation agreement transferring the loans to Mr A and Mr B on the same terms.
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