What is pre-pack liquidation?
Businesses can face financial pressures for many reasons. Most of the time, businesses can continue to trade through these, but that’s not the case for all businesses. In this article, we’re telling you all you need to know about pre-pack liquidation.
Pre-pack liquidation meaning
A pre-pack liquidation is a formal insolvency procedure that closes down an existing 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 with the same directors.
What is the process of a pre-pack liquidation?
Firstly you more always seek professional insolvency advice on something like this. Then an independent valuer will need to be instructed to assess the value of the company’s assets. This is the only legal way of buying back your company’s assets. This can be completed before a liquidator is appointed; however, the insolvency practitioner will require evidence of the valuation of the assets.
You may find yourself in trouble if you sell the assets under value to save yourself some money. This is labelled as a “transaction undervalue” and means the sale can be reversed, which is not what you want.
You may also face worse allegations of director misconduct and be accused of worsening the position of your creditors. Buying back assets is closely controlled under UK law. Don’t think this won’t be uncovered; seek independent advice. early.
Ascertaining a fair market value before the sale of any assets is fundamental to the pre-pack process and ensures that the creditors’ losses are minimised.
What are the advantages of 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 debt free from all historical debts related to the old company. This limits financial loss. - There’s also the chance for the new company to employ some of the staff who the old company previously employed.
What are the disadvantages of a pre-pack liquidation?
- The directors will have their conduct investigated by a licensed insolvency practitioner. We advise that before you make any decisions on whether a pre-pack liquidation is right for your business, you work with licensed insolvency practitioners to see what issues could arise if your company enters a pre-pack.
- Your new company may find it difficult to get credit from suppliers. You will find it especially hard if you have left the same supplier with an unpaid bill from the company you liquidate.
- In some cases, you won’t be able to use the old company name or branding.
Who can use a pre-pack liquidation?
A pre-pack liquidation can be used by an insolvent company’s director who believes there is no hope of recovery for the company in its current guise. The method can only be used when there is a genuine belief that the company can succeed past the financial problems and a fresh start will ensure the success of the business going forward.
Here are other reasons why this insolvency route may be used.
- 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 cash flow.
- If there is pressure from the company’s creditors, which could lead to the potential seizure of business assets or other negative measures.
Can I reuse my liquidated company’s name?
In some instances, you may be able to use the same company name. Before attempting to use the same company name, you should seek legal advice. There are various regulatory requirements to meet if you are to use the same company name. Using a company name when you are not allowed to could land you in trouble with fines and even a prison sentence. You will also lose limited liability protection, which means any financial issues would be your responsibility rather than your company’s.
In certain circumstances, company names can become prohibited for use under Section 216 of the Insolvency Act 1986. The key reason for this is that it was associated with the insolvent company for a minimum of a year before it went into liquidation. Directors cannot reuse the name after liquidation for a minimum of five years. They also cannot use a name which is closely related, i.e., one that might indicate an association, unless strict guidelines are followed.
There are some exceptions for re-using a company name.
1. The name is already in use
This could be by another company or even a group of companies. One arm of the business might be declared insolvent and therefore needs to be liquidated, but the remaining business units will still be able to operate under their existing name.
There is a condition for this to be allowed; the name must have been in consistent use (with no periods of dormancy) for a full 12 months prior to the liquidation of the insolvent business.
2. Court approval
The directors of the new company (newco) can apply directly to court to ask for permission to use the name of the former insolvent company (oldco). This is also known as applying for leave. The application must be made within seven days of liquidation.
The court will then investigate the new company’s position to see how robust it is financially and who will be leading it in the financial sense. Leave needs to be given within six weeks of the application date.
3. Pre-pack liquidation
Depending on the insolvent liquidation process chosen, a company or individual might be able to purchase the whole business, which would include the trading name and would therefore be able to reuse it.
A notice must be issued within 28 days of purchase to all the creditors of the insolvent business, and its acquisition must be published in the London Gazette. The new business can be referred to as a phoenix company.
We recommend seeking professional advice regarding re-using a company name. There are many rules and regulations in place that could cause issues for you and your company further down the line.
1st Business Rescue can offer honest, confidential advice to support you with your company closure. We work hard to deliver the best solutions for directors.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
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