• +1 747 212 0206
  • +44 20 3286 8868
  • +86 21 2052 0623

What is a Section 110 demerger?

Group Reorganisations

26 June 2014

The term ‘demerger’ is often used to refer to a situation where one company separates its assets or activities by transferring them into separate new companies. Often, the proportionate ownership of those new companies will reflect the ownership of the original company.

Section 110 of the Insolvency Act 1986 provides the basis for one way to achieve a demerger in relation to a UK company. That section allows a liquidator to accept shares in return for the transfer of assets by the company in liquidation.

A typical sequence of steps for the purpose of a section 110 liquidation (also known as a 'section 110 demerger') would involve the following.

  1. A new holding company (“New Topco”) is incorporated and inserted above the existing holding company which is to be demerged (“Holdco”). This may done by way of a share-for-share exchange.
  2. Holdco hives up some of its assets or shares to New Topco. Assuming that Holdco has sufficient distributable reserves, this may happen as a distribution in kind.
  3. Two or more Newcos are established (e.g. Newco 1 and Newco 2).
  4. New Topco is placed into liquidation and liquidators are appointed.
  5. Using their powers under section 110 of the Insolvency Act 1986, the liquidators transfer some assets to Newco 1 (including the shares in Holdco), and other assets to Newco 2. In return, Newco 1 and Newco 2 issue new shares to New Topco.
  6. The liquidators distribute the shares of Newco 1 and Newco 2 to the shareholders of the original company, in satisfaction of those shareholders’ rights in the liquidation. Because New Topco has not previously traded and has no liabilities, the liquidators do not have to advertise for creditors before making the distributions.
  7. The liquidation of New Topco is completed, and that company is dissolved.

Free insights

Get practical advice & insights on the Legal Implementation of Transfer Pricing for Multinational Groups

We won't share your details and you can opt-out any time. Learn more in our Privacy Policy

Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance