Date 14 June 2010
The reorganisation of a business is for the most part driven by commercial motives and as such corporate restructuring often increases in periods of economic downturn. A reorganisation under section 110 of the Insolvency Act (1986) provides a means for solvent companies to demerge their business.
Why demerge?
A company may wish to demerge its business to:
- separate key assets (say a property) from a trading operation;
- resolve a dispute between shareholders;
- remove the burden of part of a business which is subject to regulatory requirements.
As a result one company or indeed many companies within a group of companies that may have differing business operations can become individual, specialised companies making them more commercially viable.
The Formula
Section 110 Reorganisations involve the voluntary liquidation of a parent company and the transfer of its assets to two or more newly formed companies.
Each new company issues shares in consideration for the transfer of the parent company’s assets. The new shares are distributed by the liquidator to the shareholders of the liquidated company usually in proportion to their shareholdings in the liquidated company.
The parent company is then dissolved leaving two or more companies each holding part of the assets of the original parent company.
Sounds easy....?
Implementing a Section 110 Reorganisation can be a complex procedure with several practical considerations to take into account.
For example, it will be necessary to ensure that the parent company is correctly registered, there may need to be negotiation of the liquidator’s indemnity and the reconstruction agreement, the directors are required to give a statutory declaration of solvency and any company planning to make an allocation must have the necessary authority in its articles of association.
The voluntary liquidation of the parent company may also activate default clauses in financing and other documents, and in the case of a listed company, the liquidator will be required to buy out any dissenting shareholders.
A special resolution is required from the shareholders to effect the winding-up of the parent company. If the appropriate special resolution is passed it is binding on all the shareholders. Consequently a Section 110 Reorganisation can be carried out by those holding 75% or more of the company’s voting share capital.
Approval from the court is not required provided the liquidation can proceed as a Members Voluntary Liquidation (MVL) or the liquidation committee approves the reorganisation in a Creditors Voluntary Liquidation (CVL).
Protection for Creditors?
Section 110 Reorganisations concern liquidation which could result in creditor involvement.
Creditors of a liquidated company are not bound by a Section 110 Reorganisation. They remain creditors of the original company with all the rights that their debts confer.
However, if the reorganisation removes the assets of the company and the value of those assets is transferred to the shareholders, any rights the creditors may have could be of little benefit.
For this reason Section 110 Reorganisations may include an agreement and indemnity by the purchasing company to meet the liabilities of the original company or sufficient assets may be retained to meet the liabilities.
The Insolvency Act (1986) further safeguards creditors by providing that if within a year of the passing of the special resolution authorising the reorganisation, an order is made for winding-up the company, then the special resolution will not be valid unless it is sanctioned by the court.
Tax
Tax implications are inevitable by a Section 110 Reorganisation. There may be reliefs available from corporation tax on any gain on the disposal of the parent company’s assets to the newly-formed companies but care needs to be taken as those reliefs might be lost if there is a subsequent disposal of assets.
For instance it may prove impossible to avoid a degrouping charge if any of the assets being transferred came to the company from within the group of companies within a certain period of time. However, if the intention of the Section 110 Reorganisation is to split one company into several smaller ones, this may not be an issue.
Conclusion:
5 things to consider when attempting a section 110 reorganisation:
- Section 110 Reorganisation is for a solvent company only.
- It involves a voluntary liquidation.
- It can be a complicated process.
- It is not a means of removing creditors’ interests. Creditors of the parent company are safeguarded by the Insolvency Act 1986.
- Section 110 may have both positive and negative tax implications for the company and shareholders.
If you would like more information or advice relating to a specific matter concerning the reorganisation of your business please contact Chris Wilks on 01727 798083 or by email at chris.wilks@salaw.com
© SA LAW 2010
Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them. You are recommended to obtain specific advice in respect of individual cases.