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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules - Consideration treated as paid by person

EW 46D: Consideration when insolvent company’s debt repaid with consideration received for issuing shares

You could also call this:

“How insolvent companies repay debt by issuing shares”

This law applies when a company that owes money (the debtor) is in financial trouble. Here’s what happens:

You have a company that owes money. This company or someone connected to it makes a deal with another person. In this deal, the company or its associate gives shares to the other person in exchange for something valuable.

The company isn’t doing well financially when this happens. The deal says that some or all of the valuable thing the company gets must be used to pay off the company’s debt.

In this situation, the law says that the company or its associate is treated as if they haven’t actually paid the debt directly. Instead, they’re seen as having paid an amount of the debt equal to a special calculation.

This calculation looks at the market value of the shares when they were given out, how much of the debt was paid using the valuable thing received for the shares, and the total value of what the other person gave for the shares.

The law doesn’t apply if the shares were given out by converting a special kind of debt that could be changed into shares later, as long as the company was financially healthy when that debt was first created.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS851052.

Topics:
Money and consumer rights > Taxes
Money and consumer rights > Banking and loans
Business > Industry rules
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Part E Timing and quantifying rules
Financial arrangements rules: Consideration treated as paid by person

EW 46DConsideration when insolvent company’s debt repaid with consideration received for issuing shares

  1. This section applies when—

  2. a company is a debtor; and
    1. the debtor or a person (person A) associated with the debtor enters into an arrangement with another person (person B); and
      1. under the arrangement, the debtor or person A issues shares to person B for consideration; and
        1. the shares are not issued on conversion of a debt instrument that—
          1. was issued when the debtor satisfied the solvency test set out in section 4 of the Companies Act 1993; and
            1. at the time of its issue, was convertible into shares at a future time; and
            2. the debtor does not satisfy the solvency test set out in section 4 of the Companies Act 1993 at either or both of the following times:
              1. immediately before the arrangement is entered into:
                1. immediately before the issue of the shares; and
                2. the terms of the arrangement require the debtor or person A to use some or all of the consideration to pay, directly or indirectly, an amount of the debtor’s debt to the creditor; and
                  1. section EW 46C would not apply if the amount of the debtor’s debt is remitted; and
                    1. the debtor or person A uses some or all of the consideration to pay, directly or indirectly, the amount of the debtor’s debt to the creditor.

                      1. The debtor or person A, as applicable, is treated as—

                      2. not having paid, directly or indirectly, the amount of the debtor’s debt to the creditor; and
                        1. having made a payment, at the time the shares were issued, of an amount of the debtor’s debt to the creditor equal to the amount calculated using the formula in subsection (3).

                          1. The formula is—

                            shares’ market value × repayment ÷ total consideration.

                            Where:

                            • In the formula,—

                            • shares’ market value is the market value of the shares issued to person B at the time they were issued:
                              1. repayment is the amount of the debtor’s debt to the creditor that is paid, directly or indirectly, using consideration received for the issue of the shares to person B:
                                1. total consideration is the total amount of consideration paid by person B for the issue of the shares.

                                  Notes
                                  • Section EW 46D: inserted, on , by section 57 of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).
                                  • Section EW 46D(1)(cb): inserted (with effect on 1 April 2023), on , by section 66(1) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).
                                  • Section EW 46D list of defined terms issue: inserted (with effect on 1 April 2023), on , by section 66(2) of the Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Act 2024 (2024 No 11).