Where to begin

A pre-pack liquidation is a process whereby an insolvent company’s assets and business are sold to a new company at market value. This new company is known as a phoenix company. More often than not, this phoenix company is operated by the same directors as the old company. Pre-pack liquidations are complicated and often controversial procedures, so let’s take a look at some of the associated advantages and disadvantages.

Advantages and disadvantages pre pack liquidation

Advantages of a pre-pack liquidation

  • As the old company will cease to exist, so will its debts, leaving the new company debt-free. Without this historical debt, the phoenix company will be able to enjoy a fresh start, with a clean credit rating and, therefore, a better chance of future success.
  • A pre-pack liquidation can provide a better return for creditors as more funds are potentially available for distribution. As with a regular liquidation, a pre-pack liquidation offers creditors the chance to recover some funds on sale of such as goodwill, web sites, and databases.
  • Some or even all of the staff of the old company may be offered jobs at the new company, thereby protecting livelihoods.

Disadvantages of a pre-pack liquidation

  • The activities and conduct of the company’s directors will be examined to ascertain whether there has been any potential wrongdoing.
  • As the new phoenix company will not have any credit history, it may well be difficult for them to acquire credit.
  • It may be challenging for the new company to entice investors as the old company’s history may put them off. Conversely, as the new company isn’t carrying any historical debt, this may well make them more desirable to potential investors.
  • If creditors have been left with unpaid debts, this may well cause bad feeling, which may damage any future relationships.
  • You can’t usually use the same name as the previous limited company. However, in certain circumstances and provided that the rigorous regulations are complied with, you may be able to do so.

Next steps

If you’re considering a pre-pack liquidation for your limited company, it is imperative that you seek professional advice as soon as possible. The experts at 1st Business Rescue will be able to guide you through the process and help mitigate the risk of any legal implications.

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