Where to begin
If your business is facing insolvency, there are certain options available to it. It is usually preferable for the directors and shareholders themselves to enter into the liquidation process voluntarily. The alternative to this is having a winding up petition enforced upon the company by creditors or HMRC. To go through the insolvency and liquidation process formally, an expert insolvency practitioner (IP) should be instructed, as per the mandate of the Insolvency Act of 1986. By using such a company, the creditors’ best interests will be taken into account at all times.
What is a Pre-Pack Administration?
A Pre-Pack Administration is a formal insolvency procedure where the company will arrange to sell some or all of its assets to a named buyer in advance of appointing a liquidator. It is a legal way of selling the business to keep it going and get the most value for its assets.
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 re-buy all 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.
If you feel that your company fits the criteria of a Pre-Pack Liquidation, it is absolutely critical you follow the procedure completely in order to avoid legal and liability issues. Take advice early from 1St Business Rescue, so give us a call and we will be happy to help. You can call us on 0808 196 8600, message us on 07717738167 or send us an email at email@example.com.