Case study: what is a section 110 demerger?

Apr 20, 2020

A demerger is the process through which a single business entity is divided into separate companies or groups of companies. There are a number of motivations behind a demerger, such as resolving shareholder disputes, separating different elements of a business and improving the value of an element of a single business that has previously been eclipsed within the current corporate structure. On account of the rigid legislation governing companies within the UK, it is vital that the correct methodology for carrying out a demerger is used.

Section 110 demerger – what is it and why use it?

Under a section 110 demerger, the original company holds all assets prior to the demerger, which is then liquidated by its shareholders. Under the liquidation process, the appointed liquidators sell the assets of the original company to two newly incorporated companies in exchange for which they are issued shares in each of them. These shares in the two new companies are then issued to the shareholders of the original company, thereby allowing the original shareholders to become the shareholders of the two new entities. The original company’s liquidation is then completed.

There are three principal reasons why a section 110 demerger may be preferable to other demerger options. These are that:

  1. there is no requirement for the original company to have distributable reserves;
  2. there will be favourable tax conditions with neither the original company nor the shareholders making disposals that are subject to chargeable gains;
  3.  it is a useful way to isolate a risker element to a business in order to protect the remainder of the business; and
  4. it is not possible to use a statutory demerger with regard to property, as statutory demergers are only available to split trades.

Case study – real estate and property investment agency

Herrington Carmichael LLP recently completed the demerger of a real estate and property investment agency. The demerger was achieved through the section 110 route, and an assessment of the procedure implemented in this case demonstrates the key considerations that should be made in similar situations.

How the demerger arose

Prior to the demerger, there were two shareholders ( “Shareholders”) of a holding company (“Topco”). The Topco in turn was the parent company to three separate companies, two of which were estate agencies, and the other a property investment company.

Following discussions with each other, the Shareholders concluded that they wished to pursue different business objectives, with one shareholder wishing to continue with property investment ( “Shareholder B”), and the other wishing to continue with realty (“Shareholder A”). As the nature of the business involved property, the statutory demerger route, as described in more detail here, was unavailable. Another alternative would have been a reduction of capital demerger, however this requires sufficient distributable reserves on the part of Topco, which were unavailable in this situation. As such, the Shareholders agreed to a section 110 demerger.

Pre-demerger considerations

Considering the tax benefits of the transaction, HM Revenue and Customs’ approval was required to confirm that the transaction could proceed and the tax advantages could be implemented. In all demerger situations, consideration should be given to any regulatory or other consents, as this will help ensure there are no adverse financial or administrative penalties imposed.

Also, thought should also be given to the value of the business prior to the demerger. This is because the value of the business being transferred will need to be recorded within the demerger documents for tax purposes. If the value is incorrect, adverse tax penalties may be incurred.

Another pre-demerger consideration that has to be made is the incorporation of each new company. For this demerger, the Shareholders established two new companies, one of which would become the parent company of the realty business (“Newco A”), and the other the parent company of the property investment business (“Newco B”).

Newco A was incorporated with Shareholder A holding the shares in its share capital, and Newco B was incorporated with Shareholder B holding the shares in its share capital.

Demerging

Following the incorporation of the various new companies, the corporate structure of the business appeared as follows:

In order to effect the demerger, the Shareholders passed a resolution to adopt the section 110 demerger scheme and to enter into voluntary members’ liquidation of Topco, which at the time was a solvent company. Liquidators were subsequently appointed in order to handle the distribution of Topco’s assets and subsidiaries (for the purpose of this article, they shall be referred to as the “Liquidators”).

Under section 110 of the Insolvency Act 1986, liquidators are, in certain situations, entitled to accept shares in an acquiring company as consideration for the assets of the liquidated company. With regards to the demerger, therefore, the Liquidators sold the shares in the two realty agencies to Newco A in consideration for shares in Newco A, and sold the property investment company to Newco B in consideration for shares in Newco B.

Once the Liquidators held the shares in Newco A and Newco B, they distributed those shares to Shareholder A and Shareholder B respectively in satisfaction of their rights on liquidation.

Following this distribution, Shareholder A became the sole shareholder of Newco A, which was the new parent company to the real estate agencies, and Shareholder B became the sole shareholder of Newco B, which was the new parent company to the property investment company. The demerger achieved the following corporate structure:

How can we help?

While this case study only provides a simplified overview of the section 110 demerger process, it still highlights its usefulness and complexities, both from a legal and taxation perspective.

If you are considering a demerger or other corporate reorganisation and would like to speak to someone in our corporate department to discuss matters in more detail, please contact either Yavan Brar at yavan.brar@herrington-carmichael.com or 0118 977 4045 or Matthew Lea at matthew.lea@herrington-carmichael.com or 0118 977 4045.

For more insights on COVID-19 and how we can assist you or your business, visit our COVID-19 hub here. 

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter. 

By Yavan Brar

Managing Partner, Head of Corporate & Commercial Law

Categories

Latest Articles & Legal Insights

ECCTA: Changes to Companies House Fees

ECCTA: Changes to Companies House Fees

One of the hot topics of speculation surrounding the changes brought in by the act was talk of a significant increase to Companies House fees.

Red Flag Commercial Contracts Review

Red Flag Commercial Contracts Review

We understand the legal challenges that in-house lawyers face in ensuring alignment between legal advice and business objectives…

Sign up

Enter your email address for legal updates on Corporate and Commercial law.

Please see our privacy policy regarding use of your data.


Top Legal Insights

 

Contract Law

Material Breach of Contract

What is a ‘material’ breach of contract by a party to a commercial contract? This is a critical issue regularly considered by the courts. What constitutes a material breach and what are the remedies?

Property Law

Commercial Lease: The Financial impact on Landlord and Tenant

Coronavirus (COVID-19) and the restrictions now in place to control its spread, are having a significant effect on many business sectors.

Divorce and Family Law

Divorce in Lockdown: Can I get some discreet legal advice?

We have spoken to clients who are unfortunately experiencing some family issues, and would like to obtain expert legal advice, yet don’t know how...

Land & Property Dispute

Restrictive Covenants – The Price of Modification

Having identified that your land is burdened by a restrictive covenant and for the purposes of this article the covenant in question will be that only one residential building can be erected on the land. What do you do next?

Wills, Trusts and Probate

Why is having a will so important?

It is entirely up to you if and when you want to create a Will, but it is important to be aware of the consequences of not having a Will.

Award winning legal advice

Herrington Carmichael offers legal advice to UK and International businesses as well as individuals and families. Rated as a ‘Leading Firm 2024’ by the legal directory Legal 500 and listed in The Times ‘Best Law Firms 2023 & 2024’. Herrington Carmichael has offices in London, Farnborough, Reading, and Ascot.

+44 (0)1276 686 222

Email: info@herrington-carmichael.com

Farnborough
Brennan House, Farnborough Aerospace Centre Business Park, Farnborough, GU14 6XR

Reading (Appointment only)
The Abbey, Abbey Gardens, Abbey Street, Reading RG1 3BA

Ascot (Appointment only)
102, Berkshire House, 39-51 High Street, Ascot, Berkshire SL5 7HY

London (Appointment only)
60 St Martins Lane, Covent Garden, London WC2N 4JS

Privacy Policy   |   Legal Notices, T&Cs, Complaints Resolution   |   Cookies  |   Client Feedback   |  Diversity Data

 

 

Our Services

Corporate Lawyers
Commercial Lawyers
Commercial Property Lawyers
Conveyancing Solicitors
Dispute Resolution Lawyers
Divorce & Family Lawyers
Employment Lawyers
Immigration Law Services
Private Wealth & Inheritance Lawyers
Startups & New Business Lawyers

Pay Online >

Please be aware that we have no plans to change our bank details. If you receive any indication that any of our bank details have changed please contact us before sending us any funds. We take no responsibility for monies you transfer into the wrong bank account.

© 2024 Herrington Carmichael LLP. Registered in England and Wales company number OC322293.

Herrington Carmichael LLP is authorised and regulated by the Solicitors Regulation Authority with registration number 446245.