CFM30140 - Loan relationships: a short guide: the meaning of 鈥榣oan relationship鈥�

What are loan relationships?

The key definition of a loan relationship is that it is a

  • money debt
  • arising from a transaction for the lending of money

Both elements have to be present for the arrangement to be a loan relationship.

Neither part of the definition is itself defined in the legislation, although 鈥榣oan鈥� is said to include 鈥榓ny advance of money鈥�. Broadly, whether something is a 鈥榙ebt鈥� and involves the 鈥榣ending of money鈥� will be determined by case law.

A loan involves repayment

Central to the idea of a 鈥榣oan鈥� is that it involves one person (the creditor) agreeing to lend money to another (the debtor) in consideration of promise to repay that sum, on demand or at some future point, or on condition of some event happening. A loan usually, but not necessarily involves the payment of interest or an interest-like return by the debtor. The obligation to repay is central to the idea of a debt. A grant or subsidy is not debt. Difficulties can arise where repayment is contingent on something happening. See CFM31030.

A guarantee to repay someone else鈥檚 debt is not lending money.

Debt and equity are different (see CFM11000). Some debt can be converted into shares, and some debt is issued on terms that provide a return that is similar to a return from shares. So there are special rules for such convertible and index-linked debt.

Extended definition of loan relationships

There are two important extensions to this definition.

  • First, some money debts that do not involve the lending of money are within the loan relationships rules. The best example of this is that of interest arising on a trade debt. See CFM30200.
  • Second, securities are brought within the rules by CTA09/S303(3) which extends the meaning of the 鈥榣ending of money鈥� to cases where there is no actual lending of money, but an 鈥榠nstrument issued鈥� for the purposes of representing security鈥� for a money debt. For example, a company may buy an asset (such as shares in another company) by issuing a 鈥榣oan note鈥�. There has been no lending of money, but the loan note is a loan relationship.

So 鈥榣oan relationship鈥� is wide term that encompasses a wide range of financial arrangements, from simple debt such as an overdraft, to complex financial instruments.