This topic discusses:
When a loan has been repaid the loan no longer exists. In some circumstances a loan no longer exists even though it has not been repaid. When a loan no longer exists, SSAct section 1122 NO LONGER APPLIES however there may be some other type of asset, for example a debt. Further information about failed financial investments is at (220.127.116.11).
Act reference: SSAct section 1122 Loans, section 9(1)-'financial asset'
Legally, a loan ceases to exist at the time it is repaid, or when the debtor is formally released from the loan. A debtor is released from a loan contract under a bankruptcy or where the loan is forgiven.
For social security purposes, there are some other situations where a loan is also treated as no longer existing. Loans that no longer exist are sometimes referred to as irrecoverable loans, though this term is not mentioned in the SSAct. Although there is no longer a loan, there may be another type of asset, such as a debt.
A loan no longer exists for social security purposes when:
Exception: If the lender has a right to enforce the loan contract against the directors of the company on a personal basis the loan will still exist.
Explanation 1: Deprivation rules apply where a loan is forgiven, except where this occurs in the process of an irreversible wind up (i.e. deregistration for a company) of a company or trust.
Explanation 2: The debtor is required to pay because of the court order rather than the loan contract. The amount owing is now a debt.
Explanation 3: There is no longer an amount owing.
Explanation 4: The property is now an asset of the lender.
Explanation 5: A delegate should be satisfied that the wind-up of the company (or trust) is irreversible and that the wind up (or deregistration) will be completed within a reasonable time (i.e. it will not drag on for years).
Explanation 6: The deprivation rules MAY apply if the lender could have taken action before the period specified in the Statute of Limitations but chose not to do so.
Explanation 7: Where a loan has ceased to exist in these circumstances, the face value of the loan ceases to be assessable from the date the company was placed in administration.
However, the value of any remaining debt the person has the right to recover is assessed in line with the administrator's/liquidator's estimate.
The determination that a loan ceases to exist can be made as soon as a company creditors meeting decides that the company in administration is to be placed in liquidation, or placed under a deed of arrangement.
Given that a loan can only be determined to have ceased to exist when the company is placed in liquidation, or placed under a deed of arrangement, and this decision is applied back to the date the company was placed in administration, people with investments in the company will need to have their eligibility to social security payments reassessed. Payments will need to be reassessed back to the date of administration to take account of the difference in the face value of the loan that has been assessed and the value as determined by the administrator/liquidator/deed of company arrangement. In many cases, arrears of income support payments will be payable.
The value of the debt owing to a person to be assessed for the period from when the company is placed in administration is the administrator's/liquidator's estimate of the expected return to creditors determined when it is decided the company is to be placed in liquidation/the loan is subject to a deed of company arrangement.
Note: It is appropriate to take this approach where the company or trust clearly had the resources to repay the loan during the period specified in the relevant Statute of Limitations. However, this approach should not be taken in cases where the company's asset was the person's own home and they are classed as a homeowner for social security purposes.
Policy reference: SS Guide 1.1.L.66 Loans - Statute of limitations period
People may have made loans to a solicitor, attorney, legal firm or other legal practitioner to be lent to other clients of that legal practice. Alternatively, people may have made loans through schemes controlled or managed by a legal practitioner or legal firm. For social security purposes these loans no longer exist where:
If a loan ceases to exist due to these circumstances there may be another type of asset. This asset could be a debt owing, or part ownership of a property, or an amount owing from a State Law Society Fidelity fund, or an amount that will be returned to the investor after the scheme has been wound up, OR some other kind of asset. This asset should be valued on the facts of the particular case.
Some defrauded investors may be able to take action to secure compensation from a relevant state law society for some or all of their loss of capital. The POSSIBILITY that they may qualify for this type of assistance is NOT an asset for social security purposes.
Exception: A loan made to a legal practitioner or legal firm, or through a scheme managed or controlled by that practitioner or firm, will continue to exist for social security purposes if that individual or firm is removed from the relevant state role of legal practitioners for reasons other than those related to the mishandling of loan funds.
Last reviewed: 2 October 2007