The following information is for guidance only. Demergers and similar restructuring procedures can be complex and we highly recommend taking specialist advice well in advance of any procedure.
A members voluntary liquidation (MVL) is usually used as a tax-efficient way of closing a solvent company when it has come to its natural end or it is no longer required. However, section 110 of the Insolvency Act 1986 provides the opportunity for a liquidator of an MVL to transfer company assets to another company/companies in exchange for shares of the company the assets are being transferred to. This procedure has been called a ‘restructuring MVL’ and it is commonly used to demerge or part a solvent business from the larger company or corporation it is attached to in a tax effective way. A Section 110 restructuring MVL is usually tax neutral for the company and shareholders involved under sections 136 and 139 of the Taxation of Chargeable Gains Act 1992.
Clearance should be sought from HMRC by your accountant prior to the procedure being undertaken. This involves 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.
How a restructuring MVL works
- 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 should receive their original shares proportions split between the two (or more) companies.
- Partition – this involves the process above but the shares will be split differently. Instead of a shareholder having shares in all the companies where assets have been transferred, a shareholder will only take shares in 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.
When can you use a restructuring MVL?
In the event of a demerger, this process can be used when:
- 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
For a partition, you could use a restructuring MVL when:
- 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
Why should you use a restructuring MVL?
There are many reasons why using a restructuring MVL could be ideal 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 to be aware of when using a restructuring MVL?
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 a restructuring MVL
Restructuring MVLs can be very beneficial but they must be used in the correct circumstances and as a result, there are some conditions to meet and to keep in mind in order to use this process.
- Section 110 can only be used in conjunction with an MVL by a licensed IP acting as liquidator.
- Directors of the business to enter 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.