UK businesses have a multitude of options available when directors are considering closing the business. In this blog, we’re looking at pre-pack administration vs pre-pack liquidation and letting you know the key differences.
Both of these formal insolvency procedures provide a structured way to handle a business that may be struggling. Many businesses face financial difficulties, but it’s crucial that you handle them instead of burying your head in the sand.
If your business is in financial distress, it may be labelled as being insolvent. An insolvent company cannot afford to pay its debts when they fall due or its liabilities are worth more than its assets. If you suspect that your company is becoming insolvent, you must seek professional advice.
There are plenty of options available to businesses. By speaking to a professional, you can determine whether the business is likely to need closing or could be rescued.
What is a pre-pack administration process?
A pre-pack administration is used to rescue a company that is struggling. Instead of just the assets being saved, the business is saved too. This can be extremely handy, as the business is labelled as a going concern, and therefore jobs, contracts and relationships can remain as they are. Employees may be transferred to the new company under TUPE regulations, though some contracts may not transfer automatically.
The pre-pack deal is agreed upon before the company enters administration, and the sale of the business and its assets typically proceeds quickly, resulting in minimal disruption.
What is a pre-pack liquidation?
Although not a formal term in insolvency law, a pre-pack liquidation generally refers to a situation where the sale of company assets is arranged before entering a Creditors’ Voluntary Liquidation (CVL). The sale of assets is completed before the company enters liquidation, and therefore, they must be sold at a fair market price. Selling assets at below value could land you in trouble and lead to personal liability, which is not ideal when you are already dealing with financial pressure.
The sale of assets is pre-arranged, meaning that they are sold to a new company, known as a phoenix company, which often belongs to the existing directors of the original company.
Any money that originates from the sale of assets is used to pay off the creditors of the insolvent company. Once the creditors have been paid, the company can be closed. In some instances, some or all of the unsecured creditors or secured creditors may not receive any money during a liquidation procedure.
What are the key differences between pre-pack administration sale and pre-pack liquidation?
There are some key differences to be aware of when it comes to pre-pack administration and liquidation insolvency processes.
Pre-Pack Administration:
- The business can continue to operate, minimising disruption
- Employees may transfer under TUPE regulations
- Ongoing contracts and relationships can continue
- Creditors are paid from the proceeds of the sale
Pre-Pack Liquidation:
- The company stops trading and is closed
- Business assets are sold to a new company (phoenix company)
- Employees are usually made redundant
- Creditors are paid from the proceeds of the asset sale; unsecured creditors may get little or nothing
When should you choose each option?
A pre-pack liquidation is most commonly used for businesses which have no hope of recovery, but still have assets. It’s really important to speak to a professional about this who will assess your current situation and offer trusted advice.
A pre-pack administration enables businesses to continue trading under new ownership. Company creditors often favour it as it offers less disruption and a better return for them.
Why choose a pre-pack process?
Liquidating a company can be a time-consuming process, especially when there are numerous creditors or contracts to manage. A pre-pack can be recognised as a faster process for many businesses. Whether your business is closed via liquidation or can continue through administration, a faster process is appealing for both directors and creditors.
Using a pre-pack structure often enables directors to maximise the value of assets. It often means that creditors can benefit from more of the money they are owed.
How much is a pre-pack administration?
A pre-pack administration is a costly procedure. On average, it can cost between £20,000 and £100,000. For larger companies with more complex requirements, this price can be higher.
How much is a pre-pack liquidation?
A pre-pack liquidation is often cheaper than an administration as there may be fewer complexities involved. You will need to seek personalised advice from a licensed insolvency practitioner to understand the costs involved. The liquidator must act in the best interests of creditors when approving the pre-pack sale.
For both processes, we recommend that you speak to a few providers before agreeing to work with one. Ensure that all costs are documented in writing and that the licensed insolvency practitioner has thoroughly reviewed all aspects of your business, including outstanding debts and loans.
Why you should seek professional advice
It’s really important that you seek professional advice from a trusted provider. All company situations are different and therefore it’s vital that you receive personalised advice based on your own circumstances. Read our blog on liquidation vs company administration.
It’s essential that your appointed insolvency practitioner helps you to fulfil all legal requirements and has your company’s best interests in mind. In some cases, a creditors’ voluntary liquidation may be more suitable.
At 1st Business Rescue, we can support you with all aspects of company closure and rescue. We provide trusted, confidential advice which is tailored to your unique situation. Please don’t hesitate to contact us for no-obligation advice.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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