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NOTE: Important charges and non-bonding electrons are shown throughout the animation except during the transition phase
In this rearrangement OH replaces Cl but with a change in the molecular structure. The substitution goes with complete rearrangement – the amine ends up attatched to a different carbon. The reaction starts off looking like a neighbouring group participation. The intermediate is an aziridinium ion (nitrogen analogue of an epoxide). The hydroxide ion chooses to attack the less hindered terminal carbon 1, and a rearrangement results – the amine has migrated from carbon 1 to carbon 2.