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When to use a liquidation demerger

Author

Sharon Collier

An experienced Chartered Tax Adviser and Trust and Estate Practitioner, Sharon joined ETC Tax in September 2016.

There are circumstances in which a demerger utilising a liquidation under s.110 Insolvency Act 1986 can be a very powerful tool when other forms of demerger are not appropriate.

What is a liquidation demerger?

A section 110 liquidation demerger involves the liquidation of a parent company and the transfer of its assets to two or more companies. In consideration for the transfer of the assets that the liquidator distributes to them, each such company issues shares to the shareholders of the liquidated company in satisfaction of their rights on the winding-up. The parent company is then dissolved, leaving two or more companies, each holding part of the assets of the original parent company.

Pros and Cons of a liquidation demerger

The main advantage of this type of demerger is that it can be utilised in scenarios where it is not possible to use direct or indirect dividend methods either because they are impractical or the relevant tax reliefs cannot be obtained.

For example statutory demergers cannot be utilised in situations where :

  • the companies involved are not “trading” companies,
  • a 75% group relationship does not exist between the distributing company and the company to be demerged
  •  the demerger is taking place in advance of a sale or float.

A company not having sufficient distributable reserves can be another issue. Whilst a court approved reduction of capital may be an alternative in this scenario, the expense and time involved in the court process can make this unattractive.

The main disadvantage to this route is that a liquidator must be appointed and the formal liquidation process followed.

Scenario in which we have used a liquidation demerger

We were recently advising a family group who were looking to potentially sell their trading businesses. However over the years the holding company, as well as holding shares in the trading subsidiaries, had acquired a number of commercial properties, utilised both internally within the group and let externally.

In discussion with the client and their advisors it became clear that from a commercial perspective it was necessary to find a way to restructure the group to separate the properties from the trading businesses.

We advised that a liquidation demerger could be used to achieve the desired result. We have successfully obtained the necessary clearances from HMRC which mean that the restructuring can be undertaken without crystallising any tax charges. The final position will be that the shareholders will hold shares in a new property company and shares in a new holding company of the trading subsidiaries. This will achieve their objectives and allow them to seek a buyer for the shares in the holding company of the trading group.

If you or your clients have any queries in relation to liquidation demergers or reorganisations more generally please get in touch.

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