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Updated: 26th February 2020

A section 110 demerger is a method of dividing parts of an organisation that were originally under common ownership. There are various types of demerger in the UK, but a section 110 demerger involves closing down a holding company via solvent liquidation.

Section 110 of the Insolvency Act, 1986, allows for a liquidator to accept shares in consideration for assets transferred from a holding company to at least two new limited companies formed specifically to segregate and reorganise a group structure.

An organisation might want to simplify its structure for a number of reasons – perhaps to protect certain aspects of the business, for example, prepare part of the group for sale, or to facilitate a succession plan.

What happens during a section 110 demerger?

This form of demerger uses solvent voluntary liquidation to achieve the organisation’s aims of simplification, and because a formal liquidation process is required, by law it must be carried out by a licensed insolvency practitioner (IP).

Either the original company, or a newly incorporated holding company formed to enable the demerger, undergoes solvent liquidation after transferring shares and/or assets to two or more new companies.

Forming a new holding company that stands above the original parent company can be a better option in many cases, however, given the absence of trade creditors and other liabilities, making the process more straightforward for the liquidator.

What is a section 110 reconstruction?

Section 110 reconstruction is the latter part of the process where two or more new companies are formed to receive the reorganised assets from the holding company – essentially, reconstructing the business as required by the directors/shareholders.

The steps in a section 110 demerger/reconstruction typically include:

  • New holding company formed
  • Exchange of shares in the original parent company for shares in the new holding company (in the same proportions)
  • Relevant assets in the old parent company segmented and transferred to the new holding company
  • At least two new companies formed to receive the segmented assets
  • New holding company liquidated and assets transferred to new companies in exchange for shares, distributed to shareholders of the liquidated company

Further considerations when undertaking a section 110 demerger

  • A number of legal and tax-related issues arise during a section 110 demerger, and completing the process in the most tax-efficient manner is a key consideration. The availability of tax reliefs should be established and the necessary clearances obtained from HMRC where appropriate.
  • A liquidator will need to be appointed and indemnified against any liabilities emerging during the liquidation process.
  • Directors must sign a Declaration of Solvency prior to the commencement of the Members’ Voluntary Liquidation.

RBR Advisory provides professional, independent guidance and support to organisations in all industries. We can advise whether a section 110 demerger is appropriate for your business, and if so, ensure it is completed in the most tax-efficient manner. Call one of the team for unbiased expert advice.

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