Section 110 Liquidation Schemes – Demerging the Diversity
In the current financial climate companies are operating in increasingly challenging economic circumstances. The pressure is on, not only to stimulate new business and explore avenues of growth potential, but also to review existing structures and see if any changes can be made to obtain tax and/or other commercial advantages and streamline cost. Reviewing structural aspects can be of particular relevance to companies, which operates a number of different business activities under a single “umbrella” company.
In certain circumstances, it can be advantageous to separate such diverging business activities by transferring one or more businesses into a separate vehicle by way of a demerger. There are several methods to achieve such a demerger. This article focuses on a scheme under section 110 of the Insolvency Act 1986 (“section 110 IA scheme”) by private limited companies in the context of a solvent liquidation.
So why demerge?
Typical commercial reasons for undertaking a demerger include:
- severing unprofitable or under performing elements of a business from the profitable and/or better performing elements of the business;
- segregating businesses that do not have a common strategy;
- separating businesses which operate in different markets;
- unlocking shareholder value in particular business lines; and/or
- separating part of a business which is subject to regulatory or other particular industry; requirements, which may obstruct the functionality of the remainder of the business.
When are section 110 IA schemes particularly useful?
Section 110 IA schemes can be particularly useful in circumstances where the company proposing to undertake a restructure:
- has insufficient distributable reserves to make a distribution (however, please note the paragraph number 6 (Distributions of Assets) below the paragraph entitled “Useful, but still remember”);
- cannot undertake a capital reconstruction;
- cannot satisfy the requirement of being a trading company for the purpose of taking advantage of the reliefs available to other more commonly used methods of demerger; and/or
- wishes to take advantage of the tax reliefs available on a section 110 IA scheme.
What is a section 110 IA scheme?
A section 110 IA scheme typically involves the elements set out below.
Incorporation of New Companies
A new company (“HeadCo”) is incorporated and a share exchange in which the shareholders of the company proposing to undertake the restructure (“ParentCo”) exchange on a share for share basis their shares in ParentCo for shares in HeadCo.
Two or more additional new companies are incorporated (together “NewCos”).
Following steps one and two above, HeadCo is liquidated and the liquidator transfers its assets (which may include shares in any underlying companies) to the relevant NewCos. A section 110 IA scheme can just involve the liquidation of the original parent company (ParentCo). However, liquidating a newly incorporated company (HeadCo) minimises the risk of a third party creditor interfering with the progress of the scheme.
In return for the transfer of the assets that the liquidator distributes to each of the NewCos, the NewCos each issue shares to the shareholders of the liquidated company (HeadCo) in satisfaction of their rights on the winding-up. HeadCo is then dissolved, leaving the NewCos, each holding certain of its assets.
Useful, but still remember…
A section 110 IA scheme could be used in isolation (see above at “What is a section 110 IA scheme”) or as part of a larger restructuring exercise and/or prelude to a sale. However, it is important to bear the few initial considerations set out below.
- Tax/Accounting Advice: the company in question should obtain tax and accounting advice from its tax advisers/accountants as to the availability of the tax reliefs applicable on a section 110 IA scheme and whether such scheme is the most suitable method of demerger (from an accounting perspective) available in the circumstances.
- Eligibility Requirements: the company that is to be liquidated (referred to as “HeadCo” in the explanation above) must be a company registered under section 1(1) of the Companies Act 2006 (which includes companies registered under its predecessor legislation). The transferees (referred to as “NewCos” above) must be a company or a limited liability partnership.
- Shareholders’ Support: HeadCo should have the support of a large majority of its members in order to make the section 110 IA scheme commercially viable.
- Liquidator’s Indemnity: a liquidator is likely to require an indemnity from the shareholders of (HeadCo) and, in certain cases, from the shareholders of the NewCos for himself or herself and the company in liquidation (HeadCo) against any liabilities that arise during the liquidation. Such indemnity is also likely to include provisions enabling the liquidator to receive fees and expenses incurred during his or her appointment.
- Directors to Swear a Declaration of Solvency: the directors of the HeadCo, which are likely to be the same as those of ParentCo, must swear a statutory declaration of solvency before the shareholders of HeadCo resolve in favour of HeadCo’s winding-up.
- Distributions of Assets: if there are to be any distributions of assets as part of the section 110 scheme (other than the dividends in specie that will be made by the liquidator under the scheme itself), it will be necessary for the company making such distribution to have the necessary authority in its constitutional documents to declare dividends in specie of assets and sufficient distributable reserves; and
- Timing: There are certain time limits, which are applicable to a section 110 IA scheme.
If you think a section 110 IA scheme could be of interest to your company and would like to discuss the points raised in this article or you would like further information, please contact Stephen Blair or Sumaira Choudary for further information.
t: 020 7227 7389
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.