What are the benefits and drawbacks of a pre-pack liquidation sale?
A pre-pack liquidation is a process where the assets and business of a company are sold at market value to a new company sometimes, but not always, managed by the same directors. It works much in the same way as a pre-pack administration, where a buyer is found prior to entering the insolvency procedure.
In pre-pack liquidation, once the assets are sold the new company – ‘newco’ – starts to trade debt-free and the old company – ‘oldco’ – is liquidated. Newco will usually trade in place of the oldco. All resources from the oldco will normally be used within the newco. Pre-pack liquidation has many advantages to businesses but the process is controversial and not viewed favourably by some creditors.
The benefits of a pre-pack liquidation
- It can be a better return for creditors than a straightforward liquidation. In a liquidation, it can be difficult for creditors to see a return on certain intangible assets. In a pre-pack liquidation sale, it may be possible to recover some funds on sale of such as goodwill, web sites and databases which potentially will make more funds available for distribution to creditors.
- Debt-free. Historical debts relate to oldco and as such, when that company ceases to exist following liquidation, so too do those debts.
- Some employees may be employed by newco. Jobs at oldco will have been made redundant but it is possible that some or all of the staff may be offered employment with newco. Obviously, they are likely to have the necessary experience and knowledge to step straight into roles they previously occupied.
- Better chance of future success. In theory at least, the newco should have a better chance of survival without the burden of historical debt. Any new investment will not be diverted to settle old debts but can be applied on developing and expanding the business. It follows that any phoenix or newco will start afresh with a clean credit history.
The negatives of a pre-pack liquidation
- It can be difficult to obtain credit. The newco will not have any credit history and as such may find difficulty obtaining credit – certainly with suppliers who may have lost money with oldco. However, it may be possible to raise asset finance to purchase equipment or you may be able to raise finance against existing assets to provide a cash injection. Similarly, if your business is B2B, debtor finance may be the answer for cash flow needs. Our advisers can guide you to the right products.
- It may be difficult to attract investors. Often phoenix companies need investors and the history of the old company may deter some. However, the fact that newco is not carrying historical debt may actually make the business more attractive to some investors.
- It can damage relationships with creditors who face bad debts. Creditors who are left with unpaid debts understandably may be reluctant to offer credit to newco. It does come as a surprise to many directors that such suppliers are nevertheless keen to continue doing business providing they are not taking a risk by offering credit. Having already lost money, if they decide not to continue supplying they are also losing a customer and future profitable trade.
- Conduct of the director will be investigated. As part of the liquidation process, the activities and conduct of the director will be examined in the period leading up to the liquidation to determine any potential wrongdoing.
- Generally, you can’t use the same company name. When the new company is created, there are strict rules and regulations on using the same name again after a liquidation, however, in rare circumstances it can be allowed.
In summary
A pre-pack liquidation provides a swift, secure and planned transition of a business to a new company. As oldco is liquidated a new company is formed and created. Some, or all of the resources from the old company will be transferred into the new business.
How we can help
We can assess your company’s current financial situation and walk you through any potential creditor threats. We will organise any meetings that need to be put into place to go through the process of selling assets. Our expert advisors can take you through all the available options and offer free confidential advice.
Case Studies
Mercer Group
Kelly Burton • Construction & Engineering • Pre-Pack Administration
All 38 jobs have been saved at a Bolton construction trade company after administrators at Wilson Field sold the company in a pre-pack deal to existing management.
Joint administrators Kelly Burton and Lisa Hogg from Wilson Field were called in by directors of Mercer Group on 7 July 2017.
The company, based at Turton House on Wellington Road in Bolton, had suffered due to serious underpayments from clients resulting in VAT and PAYE arrears and issues with HMRC.
Mercer Projects Ltd bought the company for an undisclosed sum with all 38 staff from across the group being transferred to the new company under TUPE.
As well as saving jobs, estimated redundancy and holiday pay totaling almost £97,000 were mitigated resulting in a better return to creditors.
Kelly Burton, director and insolvency practitioner at Wilson Field, said;
“We are pleased that the sale of the company to Mercer Projects has resulted in all 38 jobs being secured and that the business will continue to trade.
“We determined that a pre-packaged sale would be in the best interests of creditors.”
Director Alison Mercer said;
“This has been an uncertain and very difficult period for Mercer Group but advice from the administrators at Wilson Field has made the whole process less stressful. Their communication and procedure and working closely with them has meant we have been able to keep all 38 staff.
“With our strong reputation within the sector as a multi trade company and with the same staff team, we were confident that the company has a viable future.”
Alison added;
“It is very frustrating when events which are outside of your control threaten the very existence of your business and the jobs of a loyal workforce. Working with our advisors and staff, the future of Mercer Projects now looks very positive and we are in a position to offer our customers the same high quality of products and service.”
The companies began as Mercer Brothers Limited in 2004 and D Mercer and Sons Ltd in 2009 as plastering only businesses and quickly evolved through training and business expansion into a multi-trade company, to become known as Mercer Group.
During a period of quadruple growth between 2012 and 2013, the company relocated its offices to Bolton and undertook work in both the public and private sectors including residential, educational, medical and commercial properties.
Areas of expertise included demolition, plastering, screeding, tiling, flooring, joinery, painting and decorating, structural and ground works and roofing.
It also worked in partnership with a number of local colleges and schools to provide apprenticeship schemes for 16-24 year olds to gain experience, skills and qualifications in the construction industry. Mercer Projects has continued to provide apprenticeships and currently has 4 apprentices who are working on our construction sites.
Gosschalks Solicitors of Hull advised and dealt with legal work with asset sales through Ian Maycock of Charterfields Surveyors in Manchester.
M J Squire Limited
Kelly Burton • Construction & Engineering • Creditors Voluntary Liquidation (CVL)
A bespoke joiners and shop fitters in Sheffield, M J Squire Limited, had been in its trade for more than 30 years.
However, recently it has been forced to close due to the downturn in the construction and retail industry.
The company was located at Orgeave Close in Sheffield, after working for many household names over the years including House of Fraser, Levi’s, Austin Reed and Tommy Hilfiger.
Until 2014, it had been a profitable company but over the past couple of years, it had been unable to secure profitable contracts.
February 10th, 2016 saw the appointment of Wilson Field’s Andy Wood and Robert Dymond as liquidators. This development for the company came as a result of suffering cash flow problems.
Operations at M J Squire Limited have now ceased and regrettably, all nine roles within the company were made redundant.
Andy Wood, insolvency practitioner from Wilson Field, spoke about his work on this case.
“Declining sales at M J Squires significantly impacted cash flow and the business’ ability to meet its liabilities. In the face of tough market conditions, the director has taken the difficult decision not to continue trading. The business has closed and the assets are being sold.”
“It is very sad to see this well-known local business cease to trade after over 30 years. The downturn in the retail sector has hit this business hard.”
Statestrong Limited
Kelly Burton • Manufacturing • Administration, Creditors Voluntary Liquidation (CVL)
Insolvency experts Wilson Field has helped turnaround the fortunes of a loss-making manufacturing company in Lancashire providing a new future for its 80 employees.
Businessman Russell Blaikie acquired the struggling 40-year-old Statestrong Limited, headquartered in Lytham St Annes, through a pre-pack sale and has been able to help the company immediately utilising his expertise in manufacturing and management.
Arrangements for the purchase of Statestrong’s business and assets were negotiated by Sheffield business specialists Wilson Field who affected the sale shortly after being appointed.
The company, which manufactures and supplies aerosol and liquid products for use in health and beauty, household, automotive and industry globally, posted sales of £12m last financial year, but had suffered pressure from creditors with outstanding arrears.
The total value of the deal is undisclosed but includes the business and the assets of the company based on Boundary Road in Lytham St Annes and Tarporley in Cheshire, which will now trade as Statestrong Products Limited.
Mr Blaikie said:
“Transactions of this nature are sensitive and require careful handling. The team at Wilson Field provided exactly the right professional approach.”
Wilson Field’s insolvency practitioners Kelly Burton and Joanne Wright worked closely with Mr Blaikie along with senior corporate case administrator Gareth Kinneavy.
Kelly Burton, said:
“The company had a wealth of expertise but was straddled with financial liabilities which ultimately made its future questionable. Looking forward, a previously distressed business now has a viable future.”
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