Capital Reduction Demerger Solicitors: Separating Care Home Businesses into Independent Groups

A family-owned care group ran more than one nursing home inside a single trading company, meaning a problem at one home could reach the others. The Jonathan Lea Network helped the shareholders separate the businesses through an intra-group transfer followed by a capital reduction demerger.

A capital reduction demerger is a way of splitting the businesses held by one company into separate groups owned by the same shareholders, without selling anything to a third party.

This case study explains how the restructuring was approached, why sequencing mattered and how the group ended up with independent structures for each home.

Client background

Our clients were the shareholders of a family-owned care group. The group operated through a trading company that ran more than one nursing home, each with its own site, staff team, residents and regulatory relationships. One of the homes traded from a freehold property held within the group.

This is a common position for owner-managed businesses. A structure that made sense when a company had one site often looks risky once there are separate operations, significant property assets and real value on the balance sheet. Care operators feel it more acutely than most, because the sector carries regulatory, employment and clinical risk that can arrive without warning.

The challenge and risks

Everything sat in one pot. Because the homes traded through the same company, every liability of that company stood behind all of them. A serious claim, a regulatory enforcement action, an employment dispute or an unexpected tax charge arising at one home would be a liability of the company owning them all, and creditors would not care which home caused it. In the worst case, difficulties at one site could force the sale of another or of the property supporting it.

The family also had commercial reasons to separate. They wanted the flexibility to bring different people into each business, to raise finance against one home without entangling the others, and eventually to pass the homes down different routes or sell one without disturbing the rest. A buyer for a single home would otherwise have been acquiring a share of a company carrying the other homes’ history, which usually means longer diligence, heavier warranties and a lower price.

The restructuring itself carried risk. Moving a business and a freehold out of one company into another engages the rules on distributions in the Companies Act 2006, and getting that wrong can expose a director personally. Reducing a company’s capital has its own statutory process that must be followed precisely, with filings at Companies House at defined points. Transferring a trading business moves employees automatically under the TUPE regulations, with information and consultation duties on both companies. A going concern transfer also raises VAT questions. Any one of these handled loosely could have created a bigger problem than the one being solved.

The family’s concerns were the ones most owner-managers have: cost, timescale, disruption to the homes, and whether a missed step would leave them exposed.

JLN’s approach

We ran the work in two phases so each stage was clean before the next began.

Phase one moved one care home business out of the shared trading company into a newly incorporated sister company. We drafted an asset purchase agreement covering the business as a going concern, so goodwill, contracts, stock, IT, book debts and records transferred together with the freehold, which moved by the usual Land Registry transfer form.

Because the assets passed at less than market value, the transfer engaged the distribution rules in the Companies Act 2006 and was supported by a documented assessment of the company’s profits available for distribution, completed before the transfer rather than reconstructed afterwards. That step is what protects a director against a claim that an unlawful distribution was made.

We then drew a firm line down the middle of the liabilities. Everything belonging to the transferring company at the effective time, including pre-completion borrowing and historic tax exposure, stayed with it as excluded liabilities, backed by a full indemnity in favour of the new company. Everything arising in the transferred business afterwards became the new company’s responsibility, backed by an indemnity the other way. Warranties were kept narrow and limited to title, authority and freedom from encumbrances, reflecting the nature of this intra-group reorganisation.

Employees were handled on the same principle. Mutual indemnities covered compliance with the TUPE duties to provide employee liability information and to inform and consult, and the receiving company took sole responsibility for the transferred staff, including anything arising from their employment before the transfer. On VAT, the transfer was structured to qualify as a transfer of a going concern, with a mechanism obliging the buyer to fund the VAT to the seller if HMRC ever took a different view. Tax was considered at a high level alongside the family’s accountants, as we would always recommend.

Phase two delivered the capital reduction demerger itself, separating ownership at the top. The shareholders first adopted new articles of association creating two new share classes, one carrying dividend and capital rights referable only to the first care home business and the other only to the second, so the value of each home was mapped to a distinct class before anything moved. The articles also included a director indemnity, which is standard good practice for a family company.

The shareholders then resolved to subdivide the existing shares into a larger number of smaller-denomination shares and to redesignate a portion of them into those two classes. The holding company carried out a reduction of capital cancelling those new classes, supported by a solvency statement from the director confirming there were no grounds on which the company could be found unable to pay its debts and that it would remain solvent for the following twelve months.

In satisfaction of that reduction, the holding company transferred its shares in the trading companies to a newly incorporated holding company for each home, and each new holding company issued shares directly to the shareholders in the same proportions as before. Irrevocable powers of attorney over the transferred shares protected the new holding companies during the gap between completion and registration, so voting and proprietary rights were secure from day one.

The outcome: independent demerged groups

The group came out with independent structures sitting side by side, each headed by its own holding company and each owning one nursing home, with ownership mirrored between the same shareholders. Operations, cash flows and liabilities are now genuinely separate, and a problem at one home is contained within its own group.

Commercially, the family gained options they did not have before. Each home can be financed, restructured, opened to an investor or sold on its own terms, and a future buyer can acquire one business without inheriting the others’ history.

Throughout, the homes traded normally, staff transferred with their employment continuing, and residents and their families saw no change in the day-to-day running of the home.

Why this matters for similar clients

If you are wondering how to split a business into two companies, the main lesson is about sequencing. A capital reduction demerger is not one document. It is a series of company law steps taken in the right order, each properly authorised and evidenced, with the tax and employment consequences addressed as you go. The legal work is what makes the structure hold, and it is also what protects the directors who authorise it. Trying to shortcut it, or reverse-engineer the paperwork after the event, is where owner-managed businesses tend to run into difficulty.

Timing and cost are usually the first questions people ask. A restructuring like this is a defined piece of work with a defined endpoint, and we will always give you a clear scope and fee estimate before you commit, letting you know in advance if the work looks likely to exceed it, so you can weigh the cost against the risk you are removing.

Common questions about demergers

What is a capital reduction demerger?

It is a company law process that splits the businesses or subsidiaries held by one company into two or more separate groups, each owned by the same shareholders. The company reduces its share capital and satisfies that reduction by transferring shares in a subsidiary to a new holding company, which issues shares back to the shareholders.

How long does a demerger take?

It varies with the structure and the number of moving parts. A two-phase reorganisation of this kind typically runs over several months rather than weeks, because new companies must be incorporated, an asset transfer documented and completed, articles adopted, resolutions passed, a solvency statement given and filings made at Companies House in the right sequence. Where tax clearances are sought, that adds time. We will give you an indicative timetable at the outset.

Do employees transfer when a business moves to a new company?

Where a trading business transfers as a going concern, the TUPE regulations usually apply and employees transfer automatically on their existing terms. Both the transferring and receiving companies have duties to provide employee liability information and to inform and consult, which need to be planned into the timetable rather than dealt with at the end.

Does a business transfer trigger VAT?

Not necessarily. A transfer of a business as a going concern can fall outside the scope of VAT if the relevant conditions are met, which is why the treatment should be considered with your accountants before completion and the documents should deal with what happens if HMRC later takes a different view.

Why separate two businesses into different companies?

Mainly to stop one business’s liabilities reaching the other, and to make each one easier to finance, sell or pass on independently. Separate sites and separate accounts do not achieve that on their own if both trade through the same company.

How our corporate solicitors can help

The right time to take advice is before you need it. If you are considering an investor, a refinancing, retirement or passing a business to your children, or you have simply realised that two operations in one company is not a comfortable place to be, that is the point at which a restructuring can be planned calmly. It is much harder once a dispute, a regulatory issue or a buyer’s deadline is already in play.

We are a Sussex-based firm regulated by the Solicitors Regulation Authority, acting for owner-managed businesses and as solicitors for care home operators across England and Wales, with clients throughout the UK and internationally. Our corporate solicitors handle capital reduction demergers, group reorganisations, share reclassifications, capital reductions and business and asset transfers, working alongside our commercial property and employment colleagues so property transfers and TUPE obligations form part of the same plan. We also work closely with clients’ accountants and tax advisers, because a restructuring only works when the legal and tax analysis point the same way.

If you would like to talk through how your group is structured and whether a demerger would help, we are happy to have an initial conversation about what is involved, what it is likely to cost and how long it would take. We will give you a straight view, including telling you if we think the structure you have is fine as it is.

This case study is an illustrative example based on a matter we have handled. Names, figures and identifying details have been anonymised or omitted. It describes what was achieved for one client in that client’s particular circumstances and is not a promise or prediction of the outcome of any other matter. Nothing here is legal advice and you should not act on it without taking advice on your own position.

Disclaimer: The case studies on this website are provided for illustrative purposes only and do not constitute legal advice. All identifying details have been removed or altered to protect client confidentiality. Outcomes described are specific to the circumstances of each case and may not be indicative of future results. You should seek independent legal advice before taking any action based on the information provided.

Photo by Age Cymru on Unsplash