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.
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.
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:
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.