Cancelling debt - process/considerations

[Jim-LC]

Two years ago, my company received investment from an investor in the form of senior debt. This enabled the shareholder to receive a coupon on the debt, and to enable them to sit senior to any new investment into the company. The company has underperformed and the shareholder/"lender" has agreed to waive their debt. They have agreed to cancel the debt because our poor balance sheet position is creating issues for us in terms of raising additional capital, securing insurance, providing comfort around going concern, etc.

Now we have received confirmation from our investor, is this as simple as releasing any accrued PIK interest in the accounts, and reversing/removing the debt? From communications so far, the investor has confirmed there is no benefit to seeking additional equity for the cancellation of the debt. There are limited assets in the business, and they need to ensure the management team are still incentivised, otherwise we may as well shut up shop.

Any other considerations? Wanted to gather some thoughts before I consult a lawyer/accountant. Many thanks in advance.

 

[qul]

A debt release will usually be taxable, but your company will probably have losses that can be offset against it.

If this could reduce an R&D claim, you could possibly give the investor a new class of shares that don't have the same rights as the other shares to have a conversion to equity, rather than releasing the debt.

The accrued interest should be released as you mentioned.