Solvent restructuring – MVL Section 110

A Members Voluntary Liquidation (MVL) is used as a tax-efficient method to close a solvent company when it has come to the natural end of its life or no longer serves a purpose. An MVL can also be used to restructure a business via Section 110 of the Insolvency Act 1986, also known as a ‘restructuring MVL’.

The following information is intended for general guidance only. Restructuring can be a complex process with many implications. Wilson Field does not offer tax advice and we strongly advise taking independent advice from your accountant or tax adviser before making any decisions to use an MVL in the process.

When to use a restructuring MVL

A restructuring MVL is applicable when a company wants to divide its operations into different companies, or close part or all of the business and transfer its assets in exchange for shares of the companies they go to. There are two purposes for restructuring MVL’s – either to demerge or to partition a company. Before either procedure can commence, permission to go ahead should be sought from HMRC by your accountant. This is obtained by providing a full explanation of why it is appropriate for section 110 to be used and why it is deemed to be tax neutral. If HMRC agree, the process can commence.

Demerger using the restructuring MVL

A demerger should be used by companies that wish to refocus on more profitable aspects of the business and reduce risk, for example, by separating unnecessary property from the business. During a demerger, the liquidator will usually transfer part of a business or its assets to one company and the other part of the business and assets to another company. Existing shareholders receive their original shares proportions split between the two (or more) companies.

When should you use a demerger?

A demerger will be more appropriate than a partition in the following scenarios:

• Property assets are to be separated from a trading business
• There is to be a sale and leaseback of a commercial property
• Part of the business is to be sold off
• Riskier or newer trades need to be separated from the core business

Partition using the restructuring MVL

A partition is similar to a demerger; however, the shares are distributed differently following the transfer of assets. In this procedure, each shareholder takes their proportion of shares from just one company. For example, if there are two shareholders and two companies, shares in one company will be given to one shareholder and shares in the other company will be given to the second shareholder.
A partition will be used where there are shareholder disputes, such as an approaching divorce or alternate objectives for the direction of the business.

When should you use a partition?

A partition will be more appropriate than a demerger in the following scenarios:

• Disputes between shareholders need resolving
• The two shareholders plan on divorcing soon
• There is a succession of some kind planned
• Shareholders no longer hold similar objectives for the company
• There is to be close-ended fund reconstructions

What are the benefits of using a restructuring MVL?

There are many reasons why using a restructuring MVL could be beneficial for your business, these include:

• It is more flexible and cost-effective than a statutory demerger
• It can be used to demerge an investment business
• It can be used to deal with investments and property before a sale of the business
• It allows creditors interests to be protected as a result of the process being managed by an insolvency practitioner (IP) acting as liquidator.
• It is tax effective and you can obtain advanced tax clearance for this scheme (provided you meet certain criteria, as detailed above)
• There are provisions which exist to deal with any issues such as shareholders which are in disagreement.

What should you be aware of?

There are areas to be aware of when it comes to using a restructuring MVL to deal with your solvent company, these are:

• It is not possible to liquidate a new holding company as a result of its complexity and any issues such as employees, pensions, leases etc. must be taken into account
• Relief for Stamp Duty Land Tax will not be available in a partition restructuring MVL
• It may be more expensive to use this process than using a demerger with a capital reduction process which is less expensive as no liquidator is required.
• Directors must use their due diligence to confirm that the company is solvent and that the process is not being used to avoid any claims from creditors
• The scheme must only be used for commercial reasons and in accordance with tax clearance criteria, and not to avoid tax, in order to have tax clearance and reliefs granted.

Conditions of using a restructuring MVL

Whilst restructuring MVLs can be very beneficial, they must be used in the correct circumstances.  As a result, there are some conditions to meet in order for your business to be eligible for this process.

• Section 110 can only be used in conjunction with an MVL by a licensed IP acting as liquidator.
• Directors of the business into the restructuring MVL must make a declaration of solvency in order for the process to go ahead
• To place the company into an MVL, shareholders must pass a resolution which requires a majority of 75% to vote in favour.
• Shareholders will need to provide an indemnity to the liquidator before any distributions take place.
• The solicitors involved will be required to transfer any agreements and draft any necessary documents such as stock transfer documents and land registry forms.
• It can be common for a part of the business to be transferred as a dividend in specie to a new holding company which will subsequently be liquidated instead of transferring this to the main holding company.
• Where business assets are subject to charges in order to be transferred it will be necessary to deal with lenders during the process to ensure their security is not compromised
• If shareholders disagree with the scheme and/or creditors have not been paid, the scheme may be ruled as invalid and the company’s original position is likely to be restored.

If the scheme is ruled as invalid, the company directors are likely to be found guilty of the offence of making a declaration of solvency when there was not enough evidence to conclude that the company was indeed solvent.

In summary

MVL’s are commonly used to close down solvent companies in a tax-efficient way. However, section 110 of an MVL can be used to restructure solvent companies. HMRC will give you clearance to go ahead so long as your accountant can prove that the process will be tax neutral. Once they approve it, an insolvency practice like ourselves can take over proceedings. You can either demerge or partition your company through a restructuring MVL. A demerger will be used to transfer assets from the part of the company you are closing/separating in exchange for proportionate shares of the company/companies they go to. A partition is similar, but should be used in cases of shareholder disputes, as the shares are split so that each person gets their proportionate dividend in separate companies. There are both positives and negatives to using a restructuring MVL, as well as conditions to meet to be eligible to use it, but an insolvency practice like ourselves can evaluate the applicable benefits and drawbacks once they’ve assessed your business and it’s situation.

How we can help

If, for whatever reason, you’re looking to restructure your solvent company, we can assess your business and advise on how a restructuring MVL can be used to help you. We will listen to your objectives for the future of the business and give free, confidential advice about what would work best for the company. Understanding demergers and partitions can be confusing, but out experienced advisors can walk you through things step by step so that you’re aware of all the options and can make an informed decision yourself. Our guidance is cost-free and actionable.

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