Where to begin

A pre-pack liquidation is a formal insolvency process that closes down an existing limited company. Simultaneously, a new company is formed (often referred to as a phoenix company), which purchases the old company’s assets. This new company can then begin to trade under a different name.

What are the advantages of a pre-pack liquidation?

There are numerous benefits to a pre-pack liquidation.

  • It allows a business to continue to exist through a phoenix company, called as such because the company rises from the ashes
  • It provides a better return for the company’s creditors than a regular liquidation
  • The new company that comes into existence will be free of all historical debts related to the old company
  • There’s also the chance for the new company to employ some of the staff who were previously employed by the old company.

When would a pre-pack liquidation be appropriate?

Firstly, to begin a pre-pack liquidation, the limited company must be considered to be insolvent and at risk of chasing creditors. If it appears that the business could trade itself out of its current predicament, then other procedures such as refinancing or a CVA may well be more suitable. A pre-pack liquidation may be an appropriate course of action in the following circumstances:

  • If the company could still be profitable but its historical debts impede it
  • If the core business remains profitable but the company is unable to repay its debts as and when they fall due
  • If the company has experienced bad debt, which has affected its overall financial health
  • If the company still has a good business model but is suffering from severe problems with its cashflow
  • If the company is experiencing creditor pressure, which could lead to potential seizure of assets or other negative measures.

The pre-pack liquidation process

Like a Creditors’ Voluntary Liquidation (CVL), the pre-pack liquidation procedure is reasonably straightforward for most limited companies. However, there is one key difference. Once appointed, the liquidator will carry out the usual duties except for realising the company’s assets. In a pre-pack liquidation, this should already have been done by the company’s shareholders. However, the liquidator will look at the company’s activities in the period prior to the liquidation to make certain that any asset disposals were made at market value.

Do I have to use a different name for the new company?

In limited situations, you may be able to reuse the company name after liquidation, or at least one that is very similar. However, there are stringent rules that must be adhered to before using the same trading name as before. If the conditions are not met, then this can lead to fines, loss of limited liability and even the prospect of a prison sentence. It is always best to seek legal advice before deciding on your new company’s name to ensure that all regulations have been complied with.

How to determine if a Pre-Pack Liquidation is right for your business

There are specific criteria the company will have to meet in order to go down this particular insolvency route. They are defined below:

Does the company have the potential to succeed?

Any company could find themselves struggling at some point thanks to a whole range of issues and unforeseen circumstances that may have occurred. This could compromise the company’s cash flow in the short-term but with a bright future still in the long-term if you could just get past this point. If your creditors are unwilling to help you through this challenging period, a CVA might be helpful, although not always as even reducing debts might not be enough to save your business. In this instance, a Pre-Pack Administration might be viable as you will be able to maintain trading whilst you are in the process of selling it on to a third party. You could even be the one running the other business, but assets will need to be sold at market value to avoid any issue. The funds generated from selling the business will enable the creditor debts to be repaid, thus alleviating the problem for the new company.

What other options are there for debt repayment?

If you wish to go through a Pre-Pack Liquidation, you must be able to prove that there is literally no other way of re-paying the creditors before starting the process. Basically, without the Pre-Pack Liquidation, it must be the case that the company will go bust and will not be able to repay its creditors. The reason for this is that when the assets of a company have been sold, the company is usually dissolved, and with that, any liability to repay the creditor debts. In a limited liability company, the directors will have no personal obligation to meet these payments, so the creditors would be at a severe disadvantage. Suppose the business was going to close, leaving the creditors without payment anyway. In that case, the company will be able to prove in court that a Pre-Pack Liquidation will have a beneficial impact on creditors and is, therefore, the preferable option.

Are the directors able to buy the company assets?

One type of Pre-Pack Liquidation is for the directors to buy back the company’s assets and re-open it under a new name (often called ‘phoenixing’). The new company would be free of past debts and can become profitable far more quickly. For this to happen, the directors must be able to prove they have the means to buy the assets at market value, and if they can, Pre-Pack Liquidation could be the best solution.

Next steps

If you are considering a pre-pack liquidation for your limited company, please get in touch with the experts at 1st Business Rescue. We will guide you through the process and discuss whether this is indeed the right course of action for your business.

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