Inter-company debt is money owed between two or more companies that share common ownership or form part of the same group. When shareholders fall out or a group is wound down, these loan accounts are regularly disputed. A forensic accountant reconstructs the account from source records and produces the defensible balance figure used in litigation.
What is inter-company debt and how does it arise?
Inter-company debt is a loan or credit balance recorded between two or more companies that are related by common ownership, directorship, or group membership. It arises when one company in a group provides funds, goods, or services to another and the consideration is not settled immediately but instead recorded as a receivable in the lending company's accounts and a payable in the borrowing company's accounts.
The most common forms of inter-company debt in small and medium-sized enterprises are:
- Intra-group loans, where one group company lends cash to another, typically to fund working capital or investment where the borrowing company cannot access external finance on competitive terms
- Management charge arrangements, where a holding company charges subsidiaries for shared services such as finance, HR, IT, or procurement, and those charges accumulate as a payable if not settled monthly
- Inter-company trading balances, where group companies trade with each other on credit terms and the resulting receivables and payables are held on the respective balance sheets
- Director-facilitated transfers, where cash is moved between group companies at the direction of a common director, sometimes without formal documentation at the time of transfer
In a functioning group with aligned shareholders, inter-company balances are managed as part of normal treasury operations and rarely cause problems. They become a source of dispute when the relationship between shareholders breaks down, when one company enters insolvency, or when the ownership of one entity changes and the new owners inherit a balance sheet they did not expect or agree to.
When does inter-company debt become disputed in a shareholder dispute?
[CONTENT_IMAGE_1]Inter-company debt is most often disputed when shareholders who previously trusted each other to manage the group's finances stop doing so. The common triggers are a breakdown in the shareholder relationship, a disagreement about the value of one party's holding, an exit negotiation, a petition for unfair prejudice, or the entry of one or more group companies into insolvency.
In an unfair prejudice petition, one shareholder may argue that inter-company transfers were made at the direction of a majority shareholder to extract value from the company without proper authorisation or approval. The forensic accountant's role in that context is to trace the transfers, identify who authorised them, and quantify the financial effect on the petitioning shareholder's interest in the company.
In an exit negotiation, the parties may disagree about whether a loan shown on the balance sheet as owing from a related company is genuinely recoverable or whether it has in substance been written off or forgiven through course of dealing over a period of years. This matters significantly because a £500,000 inter-company receivable on a balance sheet may be worth nothing if the borrowing company has no assets and the loan was never formally documented or enforced.
In insolvency, the liquidator or administrator has a statutory duty to investigate inter-company transactions and recover amounts owed to the insolvent company. Forensic accountants are regularly instructed to assist officeholders in reconstructing loan accounts, identifying which balances are genuine recoverable debts and which represent informal value transfers that may need to be challenged as antecedent transactions. See our article on antecedent transactions in insolvency for a detailed view of how those challenges are pursued.
What records are needed to prove an inter-company debt?
[CONTENT_IMAGE_2]The records needed to prove an inter-company debt are the same records required to prove any other loan: evidence that money or value was transferred, evidence that the transfer was intended to create a repayable obligation rather than a gift or distribution, and evidence of the outstanding balance after accounting for any repayments or agreed set-offs.
In practice, the documents a forensic accountant will request when instructed on an inter-company debt dispute include:
- Bank statements for both companies covering the period of the alleged debt, to identify cash movements between accounts and confirm the direction and timing of each transfer
- General ledger and nominal ledger extracts for both companies, showing how the inter-company balance was recorded over time, including any adjustments, write-offs, or reclassifications made by management
- Loan agreements or board resolutions authorising the transfers, confirming the terms (interest rate, repayment schedule, security if any), and establishing the intended legal character of the debt
- Management accounts and statutory accounts for both companies for the relevant periods, which will show the inter-company balance as recorded by each party and any discrepancies between the two sets of records
- Correspondence and board minutes relating to the arrangement, which may establish the parties' intention and may also reveal whether any forgiveness, capitalisation, or set-off was agreed at any point
Research by the Institute of Chartered Accountants in England and Wales has found that a significant proportion of SME insolvencies involve inter-company balances that have never been formally documented. Where documentation is absent or incomplete, the forensic accountant must reconstruct the debt position from the underlying financial records rather than from the terms of any written agreement.
How does a forensic accountant reconstruct an inter-company account?
[CONTENT_IMAGE_3]An inter-company account reconstruction is the process of building an accurate, chronological record of all transactions between two companies from primary source documents, when the company's own accounting records are incomplete, unreliable, or in dispute between the parties. The output is a schedule showing every transaction affecting the inter-company balance, the running balance at each point, and a defensible closing figure for the debt at the relevant date.
The reconstruction process typically follows four stages. First, the forensic accountant obtains and reviews all available primary source documents: bank statements, payment records, invoices, journal entries, and any board authorisations or resolutions. Every document is catalogued so that the source for each transaction can be identified in the final report.
Second, every transaction relevant to the inter-company relationship is identified and listed chronologically, with each transaction cross-referenced to the source document from which it was derived. This stage often surfaces transactions that have been posted to the inter-company account but are not supported by any primary document, and transactions that are evidenced by primary documents but have not been posted to the account.
Third, any discrepancies between the parties' respective accounting records are investigated. It is common in SME group structures for the inter-company balance to be recorded differently by each party, either due to timing differences in posting, different accounting treatment of the same transaction, or deliberate reclassification by one party in their own interest. The forensic accountant identifies each discrepancy, traces it to the underlying transaction, and produces a view on which recording is correct and why.
Fourth, the forensic accountant calculates the closing balance using the reconstructed transaction schedule and produces a report setting out the methodology, findings, and opinion on the balance. Where specific transactions cannot be resolved on the available evidence, the report identifies them as outstanding and quantifies the range of possible balance outcomes depending on how those uncertain items are treated.
In practice, the most significant challenge in inter-company debt reconstruction is rarely the volume of transactions but the absence of contemporaneous documentation for transfers that were authorised verbally or by email rather than by formal board resolution. The forensic accountant's experience of working from incomplete records is as important as their technical accounting knowledge.
What are the most common disputes about inter-company balances?
The most frequently contested issues in inter-company debt disputes are the legal character of the original transfer, the applicable interest rate, the effect of alleged set-offs and cross-claims, and the reliability of the accounting records produced by one or both parties.
Legal character of the transfer is disputed when one party argues that what appears in the books as a loan was in substance a distribution, a gift, or an informal arrangement that was never intended to create a repayable obligation. This is most common in closely held companies where cash was moved between entities at the direction of a common director without formal documentation. Resolving this requires analysis of surrounding correspondence, board minutes, and the accounting treatment adopted at the time of the transfers.
The applicable interest rate is contested when the loan agreement is silent on interest or when the parties disagree about whether interest was ever intended to be chargeable. Where a loan is undocumented, one party may argue that interest should accrue at a commercial rate, while the other contends the arrangement was interest-free by agreement. The forensic accountant calculates the balance under each scenario so that the court or arbitrator can apply the correct rate once the legal question is resolved.
Set-offs and cross-claims arise when the borrowing company has its own claims against the lending company and wishes to apply those claims in reduction of the debt. The forensic accountant's role is to identify each alleged set-off, quantify it from the available records, and assess whether it is properly chargeable against the inter-company balance or whether it constitutes a separate stand-alone claim.
Record reliability is a live issue in many cases where one party was responsible for maintaining both sets of accounts, or where the accounting function was centralised in one entity controlled by one shareholder. The forensic accountant assesses the reliability of each party's records by cross-referencing to primary source documents, and their report identifies where the accounting treatment cannot be supported by the underlying evidence. This assessment can itself be significant in the litigation, because a finding that one party's records are unreliable has implications beyond the specific inter-company balance in dispute.
What does an inter-company debt reconstruction report include?
An inter-company debt reconstruction report produced by a forensic accountant is a structured expert document suitable for use in litigation, arbitration, or settlement negotiation. It sets out the expert's instructions, the documents reviewed, the methodology applied, the findings of the reconstruction, and a concluded opinion on the balance of the debt at the relevant date.
A complete report will include:
- A summary of instructions, identifying who instructed the expert, what question they have been asked to answer, and any limitations placed on the scope of the instruction
- A schedule of documents reviewed, listing every source document used in the reconstruction with a note of where it was obtained and what it contains
- A transaction schedule, listing every transaction affecting the inter-company balance in chronological order, with the source document reference and running balance at each date
- An analysis of disputed items, identifying each transaction or accounting entry that is in dispute between the parties, the competing arguments, and the expert's view on the correct treatment
- A closing balance opinion, expressing the expert's concluded view on the outstanding balance as at the relevant date, with alternative figures where the outcome depends on how specific disputed items are resolved
- A CPR Part 35 statement of truth where the report is produced for use in civil litigation in England and Wales
If you are a solicitor or accountant handling a shareholder dispute or insolvency involving inter-company debt, contact Key Ledgers to discuss how a forensic accounting instruction can support your client's position.
Frequently asked questions about inter-company debt
What is the difference between a director's loan account and an inter-company loan account?
A director's loan account records transactions between a company and one of its individual directors, including cash lent by the director to the company, amounts drawn by the director, and expenses paid on the director's behalf. An inter-company loan account records transactions between two separate legal entities. Both can be disputed in similar ways, but they have different legal frameworks: director's loan accounts are subject to Companies Act 2006 requirements around authorisation, disclosure, and repayment that do not apply to purely commercial inter-company lending between unrelated entities.
Can inter-company debt be claimed in insolvency proceedings?
Yes. When a company enters insolvency, the officeholder has a statutory duty to identify and recover all debts owing to the company, including inter-company receivables from related entities. Where the related entity is also insolvent or lacks sufficient assets, the officeholder may also investigate whether the inter-company transactions constitute antecedent transactions challengeable under sections 238 to 239 of the Insolvency Act 1986 as transactions at an undervalue or preferences.
What if the inter-company loan was never formally documented?
Absence of a formal loan agreement does not automatically mean there is no debt. Courts will look at the substance of what happened: was money transferred, was it intended to be repayable, and has it been treated as a debt in the company's own accounts? A forensic accountant reconstructs the position from bank statements, ledger records, and correspondence to produce a defensible view of the balance regardless of whether a formal written agreement was ever created.
Written by the Key Ledgers forensic accounting team. Key Ledgers provides forensic accounting and expert witness services in financial disputes across England and Wales, including inter-company debt reconstruction, shareholder disputes, and insolvency investigations.
Sources: Companies Act 2006, Part 10 (director's loan provisions); Insolvency Act 1986, ss.238 to 239 (antecedent transactions); ICAEW technical guidance on inter-company transactions in SME groups.