Recharacterisation
From Wikipedia, the free encyclopedia
Recharacterisation in law (and sometimes in accountancy) means the treatment of a certain course of conduct in a different manner to which the participants describe it.
- In the U.S.A. the term recharacterisation (or recharacterization) is usually used to refer to money which is advance to a company as a loan by a shareholder or other insider, which is recharacterised on bankruptcy as a capital contribution to the shareholder's equity.
- Also in the U.S.A., tax lawyers sometimes refer to recharacterisation of the treatment of a contribution as being made to another type of IRA instead of the IRA that the contribution was initially made, for which there are specific rules.
- In other common law legal systems, recharacterisation usually refers to the risk that a title transfer arrangement could be treated instead as the grant of a security interest. If a transaction is recharacterised in this manner, there is a risk that the transaction may be void if it has not been registered under applicable registration laws.[1] The title transfer arrangements that are perceived to be vulnerable to recharacterisation are transfers of margin (such as a title transfer under an ISDA Credit Support Annexe as security for a derivatives transaction), or transactions which involved an actual transfer of securities backed by cash (such a stock loan or repo transaction). Retention of title clauses may also sometimes be recharacterised in this manner. Security interests which are expressed as fixed charges are sometimes recharacterised as floating charges. However, in most common law systems, there is a resistance to recharacterisation transactions of this nature, and the law generally provides that the parties own characterisation of the transaction should be applied unless there are stong countervailing reasons to recharacterise.[2]
- Another area in which the courts have had to address recharacterisation risk is in relation to the transfer of receivables, frequently in securitisation transactions. To be effective a securitisation normally requires a "true sale" of receivable, but in certain countries there is a risk of the transfer being recharacterised. If the originator retains a right or an obligation regarding the transferred assets, for example, where the transferor has agreed to assume and bear the credit risk for the transferred receivables, or where the transferor is entitled or obligated to repurchase and regain the transferred receivables, under many legal systems this would be recharacterised as either an on-loan or a collection agency arrangement.
- Certain sophisticated financial instruments (such as synthetic leases) are considered to be a recharacterisation risk in some jurisdictions.[1]
However, the application of recharacterisation is also a general principle of the law of most countries, and may be applied to an artificial arrangement which seeks to artificially overcome a certain law or regulation. For example, in Street v Mountford [1985] 1 AC 809 the House of Lords confirmed that an agreement described as a license for non-exclusive occupation of a property should, in fact, be treated as a lease for the purposes of determining the licensees' (or tenants') rights, although Lord Templeman did not actually use the phrase "recharacterisation" in his speech. Similar, in many jurisdictions, tax authorities have power recharacterise transactions that are "shams", or which otherwise have no commercial substance except to mitigate tax liability.
- ^ For example, in England, most grants of a security interest must be registered within 21 days at Companies House
- ^ WDA v Export Finance Co [1992] BCLC 148, CA
