PHILIP A BECK
Licensed Insolvency Practitioner
41 Kingston Street, Cambridge CB1 2NU
Tel: 0800 1953605 (Free call) or 01223 367022
Fax: 0844 5048737
Section 110 refers to an innocuous looking section of the Insolvency Act 1986 which simply allows a liquidator to accept shares in a new company or companies as consideration for a part or whole disposal of the business of the company in liquidation. It is commonly used where a company has more than one business, and it wants to dispose of one of its businesses.
The problem with doing this outside a liquidation is that the disposal by a company of part of its business could give rise to a chargeable gain for corporation tax purposes, this tax is assessable on the company, when the proceeds are then paid to the shareholders as dividends, a further tax will be assessed on the shareholders.
Under a Section 110 Reconstruction, two new companies would be set up, one to take on the business being sold, and one to take on the business being retained. The old company would then be placed into solvent liquidation, and the liquidator accept shares in the two new companies as consideration of the transfer of businesses from the old company to the new ones. The liquidator would then transfer the shares in the two new companies to the shareholders of the old company as their distribution in the liquidation of the old company. The shareholders would then sell their shares in the new company running the business being sold, to the buyer of that business.
Clearance can be obtained from HM Revenue & Customs that no chargeable gain will occur upon sale of the businesses to the new companies, but instead that the cost of the new shares being acquired be deemed to be that of the original assets of the business transferred. The only tax charge that would then occur would be a capital gain when the shareholders dispose of their shares in the new company being sold.
A detailed analysis of the potential tax benefits of such a reconstruction is outside the scope of this website. Directors contemplating a part disposal of their company through a reconstruction should approach their tax advisers to analyse the benefits arising therefrom.
Philip Beck is a Chartered Accountant and Licensed Insolvency Practitioner operating since 1996 with substantial experience in undertaking liquidation, both solvent and insolvent.
Please note that this site deals only with company and tax law in the United Kingdom of Great Britain and Northern Ireland. It is not applicable to other jurisdictions.
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