Company Demergers using Section 110 Liquidation Schemes

The term “demerger” refers to the division of a company’s business activities, previously conducted by a single company or group of companies, into one or more separate companies or groups of companies.

There are many reasons why a company may wish to re-organise their business activities. For example, the company may wish to separate divisions of their business which do not share a common strategy, or raise capital by selling part of the business to a third party. It may also be used to change a part of the company’s business which is subject to regulatory requirements that can restrict its activities.

It is also commonly used to divide the assets of the business amongst its shareholders, enabling the shareholders to take a share of the assets and go off in their own respective directions.

There are usually potential tax implications when carrying out a demerger. However if the demerger is effected by way of a liquidation under Section 110 of the Insolvency Act 1986, the procedure may be approved by HM Revenue & Customs to minimise the tax liabilities.

The procedure effectively involves the liquidation of a parent company (which may have been incorporated solely for this purpose to avoid any direct liquidation of a going concern trading company) and the transfer of its assets to two or more newly formed companies. Each new company then, as consideration for the transfer of the demerged assets, issues shares directly to the shareholders of the liquidated parent company in proportion to their present shareholding, and in satisfaction of their rights on the winding up. The parent company is then dissolved, leaving two or more separate companies each holding assets of the original parent company. This procedure is commonly called a “section 110 liquidation scheme” as, at its centre, is an agreement with the liquidator under section 110 of the Insolvency Act 1986.

If a company wishes to carry out section 110 liquidation scheme, an application must firstly be made to HMRC for their approval of the scheme. If the company’s re-organisation complies with HMRC’s regulations then the tax liabilities can be kept to a minimum.

The clear advantage in using a section 110 liquidation scheme is the straightforward and tax efficient nature of the procedure. Company directors or shareholders who are considering such a procedure would be wise to consider the numerous legal and tax conditions that need to be complied with.

For further information on how a section 110 liquidation scheme can be used by your company please contact Andrew Arnott.

Disclaimer: The information in this publication is based on our current understanding of the law. It has been produced for information purposes only. Professional advice should always be sought before taking any action.

Macleod & MacCallum cannot take any responsibility for loss incurred through acting or failing to act on the basis of anything contained in this publication.