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.

Pre pack liquidation staff

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 there is pressure from the company’s creditors, 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 will be able to use the same name as the liquidated company, 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.

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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