The term “solvent reconstructions” potentially encompasses a wide range of different scenarios, including demergers, elimination of unnecessary subsidiary companies or even retirement from a business.
Members voluntary liquidations (or “solvent liquidations”) are a tool that is often used in the area of solvent reconstructions of companies often involving demerger of two (or more) separate business divisions. These can be for a variety of purposes including the sale of a section of the business, the breakdown of a relationship between business partners or simply because there is a commercial rationale for separation that demands it.
Typically the precise structure of such schemes (which are governed by section 110 of the Insolvency Act 1986) is driven more by tax considerations and the advice of a company’s taxation advisers is crucial in reviewing the scheme and obtaining clearance from HM Revenue & Customs before the scheme is brought into effect. As a result the proposed liquidator works in partnership with the company’s exiting taxation and legal advisers, although in practice the formal liquidation of the company takes place at the end of the process rather than at the beginning.
Careful planning is key in such matters and advice should be sought at the outset in order to ensure that all relevant matters are covered and undertaken in the correct sequence.
Frequently groups of companies that grow by acquisition of other companies or groups of companies end up with numerous subsidiary companies that have either been subsumed into another company within the group or have become dormant. Each one still requires the annual submission of documents to Companies House. Liquidation or dissolution provides a solution that decreases the administrative burden associated with these redundant companies. In such circumstances it may be necessary to review documents surrounding the original acquisition in order to ensure that elimination of a subsidiary does not cause a breach of any covenants give at the time.
Often a company has simply reached the end of its lifespan due to the age of the promoters, the sale of the business out of the company or because the purpose for which it has been set us has been achieved. In such instances solvent liquidations often provide a tax efficient method of extracting the company’s funds and returning them to the shareholders. Once again the advice of the company’s own tax advisers is important.
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