Recharacterisation
Encyclopedia
Recharacterization 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.
The term is most important in the penal law of Continental legal systems. In some civil law
countries, judges are empowered to "recharacterise the facts" of a case to make the charges more closely align with the evidence. In these systems, the legal charges contained in the indictment are only suggestions from the public prosecutor to the court. The judge may, if it becomes clear that the facts actually support different or additional charges, change the legal characterisation of those facts.
When the recharacterisation of the facts results in additional charges, or charges which carry a greater penalty, the defense council is usually given an opportunity to be heard concerning the recharacterisation and may request a suspension of the trial to study the recharacterisation. In others, this right to suspend the trial is only implicated if the recharacterisation results in more serious charges.
In some legal systems, the court may not recharacterise the facts if it will result in more serious charges.
However, the application of recharacterization 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 recharacterize transactions that are "shams", or which otherwise have no commercial substance except to mitigate tax liability.
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
(and sometimes in accountancy
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
) means the treatment of a certain course of conduct in a different manner to which the participants describe it.
The term is most important in the penal law of Continental legal systems. In some civil law
Civil law (legal system)
Civil law is a legal system inspired by Roman law and whose primary feature is that laws are codified into collections, as compared to common law systems that gives great precedential weight to common law on the principle that it is unfair to treat similar facts differently on different...
countries, judges are empowered to "recharacterise the facts" of a case to make the charges more closely align with the evidence. In these systems, the legal charges contained in the indictment are only suggestions from the public prosecutor to the court. The judge may, if it becomes clear that the facts actually support different or additional charges, change the legal characterisation of those facts.
When the recharacterisation of the facts results in additional charges, or charges which carry a greater penalty, the defense council is usually given an opportunity to be heard concerning the recharacterisation and may request a suspension of the trial to study the recharacterisation. In others, this right to suspend the trial is only implicated if the recharacterisation results in more serious charges.
In some legal systems, the court may not recharacterise the facts if it will result in more serious charges.
- In the USA the term recharacterisation (or recharacterization) is usually used to refer to money which is advance to a company as a loanLoanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
by a shareholderShareholderA shareholder or stockholder is an individual or institution that legally owns one or more shares of stock in a public or private corporation. Shareholders own the stock, but not the corporation itself ....
or other insider, which is recharacterised on bankruptcyBankruptcyBankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
as a capital contribution to the shareholder's equity.
- Also in the USA, recharacterization is used in tax law to refer to treatment for tax purposes of a transaction, agreement, event, etc., differently than for other purposes. Examples include recharacterization of gains as dividends under , recharacterization of purported debt instruments as equity under case law and rulings under , and recharacterization of entities under "check the box" regulations .
- In other common lawCommon lawCommon law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
legal systems, recharacterisation usually refers to the risk that a title transfer arrangement could be treated instead as the grant of a security interestSecurity interestA security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
. 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. The title transfer arrangements that are perceived to be vulnerable to recharacterisation are transfers of marginMargin (finance)In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty...
(such as a title transfer under an English Law ISDA Credit Support Annex as collateral 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 recharacterized in this manner. Security interestSecurity interestA security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...
s which are expressed as fixed charges are sometimes recharacterised as floating chargeFloating chargeA floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
s. 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 strong countervailing reasons to recharacterise.
- Another area in which the courts have had to address recharacterization risk is in relation to the transfer of receivablesAccounts receivableAccounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
, frequently in securitizationSecuritizationSecuritization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...
transactions. To be effective a securitization 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 a synthetic leaseSynthetic leaseA synthetic lease is a financing structure by which a company structures the ownership of an asset so that -* for financial accounting purposes , the asset is owned by a special-purpose entity and leased to the operating company under an operating lease...
) are considered to be a recharacterization risk in some jurisdictions.
However, the application of recharacterization 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
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
confirmed that an agreement described as a license for non-exclusive occupation of a property should, in fact, be treated as a lease
Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments....
for the purposes of determining the licensees' (or tenants') rights, although Lord Templeman
Sydney Templeman, Baron Templeman
Sydney William Templeman, Baron Templeman, MBE, PC, is a former British judge. He served as a Lord of Appeal in Ordinary from 1982 to 1995 in the House of Lords and was created a life peer as Baron Templeman, of White Lackington in the County of Somerset....
did not actually use the phrase "recharacterisation" in his speech. Similar, in many jurisdictions, tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
authorities have power recharacterize transactions that are "shams", or which otherwise have no commercial substance except to mitigate tax liability.