COVID-19 – Corporate reorganisations and restructuring.

Due to the impact of COVID-19 it is anticipated that business uncertainty will continue for the foreseeable future.

For this reason your company or group may consider reorganising its shareholder or business operations in order to:

  • consolidate the group structure;
  • split the group structure – perhaps to separate a loss-making part of the business;
  • reduce risks;
  • save costs;
  • move/protect assets; and/or
  • create tax advantages.

A reorganisation may involve:

  • Dissolving a company – if such company is no longer required to be part of the group;
  • Share for share exchanges;
  • Hiving up or down the assets of a company;
  • A section 110 reorganisation;
  • A scheme of arrangement;
  • Business transfers;
  • A capital reduction;
  • A demerger – if you wish to split up different parts of your business; or
  • A merger – if you wish to amalgamate different parts of your business.

There may be advantages and disadvantages of proceeding down one route instead of another and it is important that you carefully consider, at an early stage, all the options available to make sure you proceed in a way that is beneficial for your business and achieves the desired outcome. 

Below we have set out some of the preliminary issues you should consider:

Taxation – a reorganisation could give rise to tax liabilities or lead to the loss of tax reliefs. Therefore, it is important to seek professional legal, tax and financial advice from the outset to ensure that the reorganisation is tax efficient and takes advantage of any applicable tax reliefs.

Accounting – your accountants/auditors should be involved from an early stage to review and assess the proposed transaction.

Insolvency – there are risks and potential clawbacks arising under UK insolvency legislation from the transfer of assets at an undervalue and/or a preference. Furthermore, directors may incur personal liabilities if they allow a company to continue trading beyond the point where the directors should have concluded that there was no reasonable prospect of the company recovering. However, new measures proposed by the Government in response to COVID-19 should shield directors from personal liability for trading when technically insolvent. A temporary new moratorium is also to be introduced to prevent creditors from seeking to wind-up companies that are pursuing a restructuring or financial rescue. However, because an insolvency event can raise breach of director duties and director disqualification issues it is important to ensure these elements are carefully considered as part of a reorganisation.

Lenders – lenders and security holders will more than likely need to be consulted in advance and their approval sought under the terms of any finance and security documents.

Property assets – a number of issues may arise if the plan is to change the entity that owns or occupies the property. For example, formal consent of the landlord may be required. Therefore, it will be important to carefully check the terms of any lease.

Contracts and assets – it may not be possible to transfer certain assets or contracts without the consent from other parties involved.  Therefore, it will be important to carefully check the terms of any key contracts.

Employees – where a business transfer occurs, a transfer under the Transfer of Undertaking (Protection of Employment) Regulations 2006 (TUPE) may occur. Under TUPE there are stringent procedural requirements that must be followed. Therefore, it is important to make sure you are aware of these requirements to avoid any employment claims.

Overseas – if part of your group or operations are in overseas jurisdictions then local counsel may need to be involved to ensure compliance with local laws.

How can Mundays help?

Mundays has extensive experience of corporate reorganisations and would be delighted to assist you with your reorganisation or answer any initial questions you may have. We also work closely with solicitors in other jurisdictions, accountants, tax advisers and insolvency practitioners and would be happy to make an introduction for you if you so require.

The contents of this article are intended as guidance for readers. It can be no substitute for specific advice. Consequently we cannot accept responsibility for this information, errors or matters affected by subsequent changes in the law, or the content of any website referred to in this article. © Mundays LLP.

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