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
Karmik Limited
Kelly Burton • Manufacturing • Pre-Pack Administration
A well-known Bradford designer and manufacturer of bespoke kitchens for commercial and residential customers have been bought out of administration saving all 36 jobs.
Karmik Limited, trading as Designer Factory Kitchens, has been acquired by Karmik UK and will be operated by the existing management team.
Joint administrators Kelly Burton and Lisa Hogg of insolvency and business turnaround specialist Wilson Field were appointed to Karmik on 13 March.
The company, which was incorporated in 2013, had suffered two bad debts in 2016 totaling almost £100k causing severe cash flow problems and HMRC arrears.
The total value of the pre-pack deal is undisclosed but it includes the business and the assets of the company based at Fairfax House in Drighlington.
Kelly Burton, director and insolvency practitioner at Wilson Field in Leeds, said;
“DFK celebrated its 25th anniversary recently but as a result of suffering two significant bad debts found itself facing a cash flow crisis.
“After attempting without success to raise further finance, the directors sought advice and as a result of taking prompt action we have been able to save the DFK brand and all 36 employees’ jobs. As the jobs were transferred to Karmik UK, this alone saved over £44,000 in redundancy and wages claims.”
Managing director Mike Baziw commented;
“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 DFK now looks very positive and we are in a position to offer our customers the same high quality of products and service.”
Peak Toolmakers Limited
Kelly Burton • Manufacturing • Pre-Pack Administration
A Chesterfield machine tool manufacturer, which supplies to the global automotive industry, has been bought out of administration by sister-company, Peak Toolmakers (Assets) Ltd and managed by two of its current directors, saving all 46 jobs.
Peak Toolmakers Limited, based on Chesterfield Trading Centre on Smeckley Wood Close, had enjoyed a profitable trading history since 2004 and had significantly grown to become a recognised name in the sector.
However, a lack of working capital following a combination of factors together with a number of loss-making contracts with principal customers, competition from overseas, namely the Far East, undercutting prices, and extremely fast and tight timescales to allow its customers to meet contractual supply arrangements, had caused recent cash flow problems.
Insolvency practitioners Joanne Wright and Lisa Hogg from Wilson Field were appointed Administrators on 2 September 2015 to handle the sale out of administration.
The business and assets bought by Peak Toolmakers (Assets) Ltd managed by two of the existing directors, Geoff Bacon and John Buxton.
Joanne Wright from Wilson Field, said:
“Peak Toolmakers Limited had experienced financial difficulties after seeing a drop in demand from a major customer, a loss of more than £500,000 on a contract and was being threatened by enforcement action from HMRC due to arrears.
“The pre-pack deal has meant all 46 employees’ jobs have been saved and ensures a continuity of trading under new ownership.
“We are delighted to have secured a swift sale of this established Chesterfield-based manufacturing business to deliver the best long term solution for the business ensuring it can continue to serve its established customer base.”
Peak Toolmakers Limited’s main business was the production of mould tooling, jigs and fixtures and robot heads which were used in the injection moulding and die casting industries, principally the automotive industry, for internal and external trims together with under bonnet components.
Its customers produce products for a range of automotive manufacturers including Jaguar Land Rover, Nissan, Toyota, BMW and similar manufacturers.
Director Geoff Bacon said:
“Having gone through difficult times, we are very happy to have secured the loyal service of our staff through the help of Wilson Field.”
Wilson Field worked closely with solicitor Neil Kelly from MD Law in Sheffield and valuer and asset management consultant David Smith of Charterfields.
L’Etranger
Kelly Burton • Leisure & Hospitality • Pre-Pack Administration
Administrators from Wilson Field have worked with bosses at a London restaurant to serve up a rescue deal. Kelly Burton and Lisa Hogg were appointed joint administrators on 10 July to South Kensington based L’Etranger Restaurant.
Established in 2002, the Gloucester Road restaurant, located near the Royal Albert Hall and London’s Museum Quarter including the Victoria and Albert Museum, the Natural History Museum and Science Museum, had been trading as L’Etranger Restaurant since 2010 benefitting from the prime location for visitors and theatre-goers.
However the company sustained a significant loss following the sale of a second restaurant in 2014 and experienced mounting cash flow issues with its retained premises resulting in HMRC arrears and the threat of a winding up petition.
Keane Hart Ltd, a company owned and managed by existing management team lead by director Ibi Issolah, has acquired the business out of administration for an undisclosed sum.
Kelly Burton, director and licenced insolvency practitioner at Wilson Field, said;
“L’Etranger had suffered losses in the past few years due to the previous loss-making sale of a second premises. Funds were spent on L’Etranger which absorbed further cash flow accruing HMRC arrears and the company being threatened with a winding up petition.
“The restructuring process has resulted in the continuation of a viable restaurant and the safeguarding of all the employees and ensures that the business is financially secure for future trading.
“Five jobs have been saved and transferred under TUPE to the new company.”
L’Etranger serves Japanese-influenced French cuisine, as well as maki and sashimi alongside offering a world-class wine selection. It has been awarded a number of accolades including an AA Rosette for Best Wine List in the UK 2013.
As well as seating 80 diners in the restaurant, L’Etranger offers wine tasting, private dining and events for up to 100 people on its premises.
Shulmans in Leeds advised and dealt with legal matters with Robert McArdle of David Currie & Co in Manchester assisting with asset valuation and disposal.
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