In this economically difficult climate, directors and shareholders may well need to undertake some kind of restructuring procedure in order to remain viable.
Consider a restructuring under section 110 of the Insolvency Act 1986- a form of voluntary liquidation. This process allows a company to transfer its assets to another company in exchange for shares. This particular process of restructure, however, is only possible where the company is solvent and its assets exceed creditors’ claims.
It is used when the directors want to divide its operations into separate entities by demerging or separating parts of the business. There are no tax implications in adopting the above structure but expert tax advice will be needed. It is necessary to obtain clearance from HMRC which can be satisfied by establishing that the reconstruction is for bona fide commercial reasons.
Some of the advantages of a section 110 restructure are:
- To separate key assets from the trading business
- Resolving conflicts between shareholders
- Potential sale of part of the business
- Possible sale and leaseback of commercial property
- Possible succession planning
- It is a flexible and cost effective method rather than following the process of a formal demerger
- It can be used to transfer out an investment business
- Creditors may be protected as the process will be managed by insolvency practitioners
- It is tax efficient
This type of restructure involves the incorporation of a new holding company and two or more other new companies to hold the various assets.
Below is a summary of the steps involved:
Step 1: Incorporate a Newco above the existing Company. (The newly incorporated company will be capable of being placed into solvent liquidation.)
Step 2: Set up two or more new companies to transfer the business of the Company.
Step 3: Issue shares in Newco to the shareholders of the existing Company in exchange for its entire issued share capital.
Step 4: An intra-group transfer of the Company’s required assets to Newco.
Step 5: Call a general meeting of Newco to approve the liquidation and to appoint liquidators.
Step 6: Once in liquidation, there will be a transfer of Newco’s assets to the other new companies. The liquidation of Newco will not be linked to the new companies and so will not have any adverse effects.
Step 7: Distribute the shares to the shareholders of Newco.
A section 110 restructure is often a complicated process and it is important to seek expert advice. If you are considering this form of restructuring for your company, please get in touch with Arthur Fernandes, Georgina Kyriacou or Max Lesser for further advice.
This article is prepared with the intention of providing general information on the changes in law. Philip Ross Solicitors accept no responsibility for errors it may contain and the coverage of the topic is not comprehensive. You are advised to speak directly to the writer or another partner within this firm within any specific enquiries on the topic addressed.
Arthur is a solicitor specialising in corporate law. He has been practising law for over 30 years and has practiced abroad. He is also a notary public. He specialises in mergers and acquisitions, banking law, corporate finance including private equity, AIM listings, corporate restructuring and corporate insolvency.