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Unclaimed liabilities

We received loans from two separate sources to address a short term corporate need. Notes were for a two year term and carried interest to be accrued until maturity. The loans were introduced by a foreign third party who no longer responds to our phone or email contacts, and did not have an address or tax ID. We have been unable to contact the lenders to establish the annual audit confirmations, make repayments when due, or even discuss the rolling over of the notes from the original terms. After three years we have concluded that the lenders have "gone away" or lost interest in getting their money back in spite of all our best efforts. Im not sure what the statute of limitation is for debts, but other than waiting it out, does anyone have any idea of any procedures to write off the liability, clean up the BS to avoid showing a default situation, and limit the accumulating accrued interest expense?

Answers

Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

Simon,

I'd start by reviewing the relevant statutes. A guide to finding them is here: http://www.creditinfocenter.com/rebuild/statuteLimitations.shtml

The process (depending on the state and the agreement) is likely to start counting from the time that the first payment was missed. Technically, until the statute of limitations is up, they may have the right to come back and claim their property.

You will also need to determine whether you *would* pay them back if they came back and the time elapsed would give you the right to walk away.

You'll also need to determine if the lender could take action in their foreign jurisdiction. Determining that alone, and getting a reasonable judgement in that case, could be expensive.

If you've determined that all of the above are yes, you can eliminate it from the books and take the gain. You'll need to discuss this with the auditors as to what evidence you have that the loan is no longer payable. Technically, you may *have* to do this, as an abandoned loan is income and is thus taxable.

Until then, you might consider having an "liability reserve for abandoned property" or similar to indicate that the loan has been abandoned (so isn't a loan accruing interest), and is instead property in your possession that kicks back to you after some period.

Note, I did have one situation like this a while back. The lender had filed for bankruptcy to clear out their own debt, and had lied about the existence of the loan. They wouldn't return our calls for years, even when we sent an attorney to knock on their door. When they were clear, they then re-emerged and we had to repay. This was complicated because we had PE in their jurisdiction so they could take action there. I just bring this up as an example that until you can positively assert that you don't intend to pay and don't have to pay, you need to retain a liability.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Keith, I appreciate your input. It still seems problematic to me that it is difficult to take any position regarding a note payable to a third party when you cant deliver your claim.

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