Members’ Voluntary Liquidation: What is Section 110 Scheme of Arrangement?

December 19, 2022 / MVL

It is not uncommon for a solvent company to close for one reason or another. A company’s directors may want to retire, move on to a new project, or the company may simply not be profitable enough to continue operations. A popular solution for directors considering this path is a Members’ Voluntary Liquidation (MVL). 

During the MVL process, directors that intend to continue business in some form can choose to file a Section 110 Scheme of Arrangement. This is essentially a type of demerger, allowing the company undergoing liquidation to pass on some of its assets to a different company, allowing directors to restructure their operations effectively. 

In this article, Clarke Bell will discuss Section 110 Scheme of Arrangement and how it fits in with the MVL process.

What is a Members’ Voluntary Liquidation

An MVL is a very popular way for directors to close down a solvent company using the voluntary liquidation process. It is a formal procedure that allows directors to appoint a licensed insolvency practitioner of their choosing, who will carry out the process. This insolvency practitioner will ensure your company is liquidated as the law dictates. 

They will liquidate your company’s assets, distributing the proceeds amongst creditors (if there are any) and shareholders in an efficient manner. If you intend to use a Section 110 Scheme of Arrangement, they will also help you transfer your assets to other companies.

The MVL procedure offers considerable tax benefits, with the funds that are realised being subject to Capital Gains Tax, as opposed to Income Tax. This means a significant saving in tax expenses, as CGT tax rates are much lower. Additionally, if you are eligible, the MVL process enables you to benefit from Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) which can further increase your tax savings. This relief entitles you to enormous tax savings, with a lifetime limit of £1 million. For liquidating a solvent company with high-value assets, there is no better option.

Also Read: What Is a Signed Indemnity In an MVL?

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What is Section 110 Scheme of Arrangement?

If you choose to liquidate your company using an MVL, you will have the option to use the Section 110 Scheme of Arrangement. As we mentioned, this section is used to restructure companies, enabling the transfer of assets from the company undergoing liquidation to companies of the directors’ choice.

Using Section 110 to transfer assets is most commonly done to detach a company undergoing liquidation from a larger organisation. This application of Section 110 is most commonly known as a demerger. The reasons for conducting a demerger are plentiful, but it is most often used to delineate an organisation’s activities clearly. For example, a demerger may be used to create a smaller company that specialises in risky or commercially unproven activities, without it reflecting too much on the main organisation. Under a demerger, shareholders will retain shares in all newly created and established companies.

However, there is another form of restructuring that can be done using Section 110. This alternative method is known as partition, and has a much different effect than a demerger. Under a partition, newly created companies will be removed entirely from the main organisation, having no relation to it whatsoever. Shareholders will take shares in either the newly created company or the old one, but not a mix of both. As you might expect, this method is only done when a serious dispute has made it impossible for shareholders to agree on a shared future, and so the only path forward is to split up. 

With the overview of these two uses for Section 110 said and done, let’s take a look at both in more detail.

Using a demerger

A demerger is the less severe option of the two. In practice, this method separates a company into two or more parts; new entities are made with a view to engaging in new operations, while the older entity remains as it is, albeit a bit smaller. As these new entities remain a part of the old entity, existing shareholders will gain a proportional amount of shares in these companies, while still retaining shares in the old one. As such, demergers are best used when a company is split its operations across more clearly defined entities, or a company wishes to sell off a portion of itself.

Using a partition

Restructuring your company with Section 110 is much the same as it is with a demerger, though it has a few considerably different effects. The most notable difference is how the asset split is managed, as shareholders will not own shares in multiple companies, unlike a demerger. Instead, shareholders will have to choose between the new company and the old, taking shares in only one or the other. This tends to only be the case when an insurmountable creative difference has arisen, driving a wedge between shareholders that cannot be overcome. As continued operation in such a case is not feasible, nor desirable by the shareholders, a commercial divorce settlement is the best case scenario.

Triggering a company restructure using Section 110

In order to begin restructuring your company using an MVL, you first must gain permission from HMRC. A company restructure must be categorised as tax neutral for shareholders and the company itself, meaning the end goal of the procedure isn’t to dodge taxes or sneak assets off the books. HMRC must assess the restructure and the results of the process, then give consent for it to proceed. As such, it is a good idea to enlist the aid of a licensed insolvency practitioner, as they can put your case forward to HMRC in the best light possible, maximising your chances of success. Without permission, restructuring your company under an MVL cannot take place.

Let Clarke Bell help

If you are considering using an MVL to liquidate your company, let Clarke Bell be there to help you. 

We have more than 28 years of experience in helping company directors to find the best path forwards; and we can help you. 

For a free, no-obligation consultation, contact us today and find out what we can do for you.