Pre-pack liquidation
A pre-pack liquidation is a commonly used, informal term where a newly-formed company (sometimes referred to as a phoenix) purchases the assets of an existing company which is then liquidated.
When is a pre-pack liquidation appropriate?
To start the process of a pre-pack liquidation, a company must be considered insolvent and under threat from pursuing creditors. Where it may be possible to trade out of the situation, other insolvency procedures such as a CVA or refinancing may be more appropriate.
However, if it is clear that the company has a profitable core business, but pressure from creditors is threatening its existence, then a pre-pack liquidation could be the way forward. Pre-pack liquidation may be appropriate where the company:
- Has a good business model with a full order book but has severe cash flow problems.
- Is suffering from creditor pressure that could result in the seizing of assets or other actions.
- Can be profitable but is hampered by historical debts.
- Has suffered a bad debt and this has affected the health of the company.
Your company may qualify for a pre-pack liquidation if it is unable to repay debts as and when they fall due but crucially the core business is still profitable.
What are the benefits of a pre-pack liquidation?
A pre-pack liquidation enables the business to continue through a phoenix company and provides a swift secure and planned transition of the business. Importantly it can provide a better return for creditors, rather than a straightforward liquidation. Creditors may not see a return on certain intangible assets, but they can recover funds on sales such as goodwill, web sites and databases. The newco, will also be free of all debts related to oldco and will have the possibility of employing some staff who were previously employed by the old company.
In theory a pre-pack liquidation has lots of benefits. Without the burden of historical debts, the newco should have a much greater chance of survival, with any new investments being used to fund operations of the new company as opposed to settling debts.
How does the pre-pack liquidation process work?
The pre-pack liquidation process is relatively simple and straightforward for the majority of companies which go through this procedure. The process is very similar to that of a CVL, however, it has one major difference.
Like most formal insolvency procedures, it begins by meeting with a consultant and going through what’s involved. After this, an insolvency practitioner will be formally engaged and act as your proposed liquidator who will then deal with any letters and phone calls from creditors. The insolvency practitioner will then write to your creditors and provide details of date, time and place in order to arrange a creditors meeting. Since the Insolvency Rules 2016, physical meetings are the exception and instead virtual meetings using such as video links or conference calls are the norm unless creditors object. Decision-making can be made in a variety of ways including the use of electronic voting or correspondence.
Creditors must have at least seven days’ notice and shareholders 14 days. Seven days prior to the meeting there must be advertisement in the London Gazette. As part of the liquidation process, directors should prepare a Statement of Affairs, which the insolvency practitioner will help with, so it’s ready to present at the creditors meeting.
There will be two separate meetings which take place. The first, a shareholder meeting passes a special resolution which requires a minimum of 75% of the members present to approve. In this meeting they will consider who to appoint as liquidator and consider resolutions to put the company into a CVL. After the shareholders meeting, there will then be a creditors meeting, where they will then cast a vote over the appointment of the liquidator. There must be over a 50% majority for the decision of liquidator.
Once the liquidator is appointed, he will carry out all normal duties, except carrying out the realisation of company assets, which should have already been done in a pre-pack liquidation by shareholders. The liquidator will consider company activities in the period prior to the liquidation to ensure that any asset disposals have been made at market value in the circumstances, to ensure the best return to creditors has been achieved.
The use of a pre-pack liquidation, allowing you to set up a phoenix company is perfectly legal. Following the formal insolvency process which sees the oldco closed down, all regulations will have been met and all creditors will have been appropriately dealt with. Directors of the newco must acquire all assets at market value, as setting up a phoenix company to transfer assets from an insolvent company for a reduced fee would be classed as a fraudulent transfer.
Can you use the same name as the previous company?
In certain circumstances you are able to use the same, or a very similar name as the previously liquidated company. There are strict regulations which much be met before you can use the same trading name as before. If the criteria are not met, it can result in fines, loss of limited liability and the possibility of a prison sentence. When deciding on the company name, it is important to seek advice from a solicitor first, so any necessary regulations can be met.
In summary
Pre-pack liquidation is a formal insolvency procedure, which essentially closes down an old company, whilst opening up a new business in its ashes. It carries a very similar formula to a CVL, with a few differences that enable a new company to start trading under a different name.
How we can help
If you’re looking to start the process of a pre-pack liquidation, one of our licensed insolvency practitioners will be able to take you through the process and discuss if it’s the right option for your business. If appointed as liquidators, we will put in place any processes that need to be completed in order to close the old company and open the new company.
Case Studies
High End Fashion Retailer
Kelly Burton • Retail • Pre-Pack Administration
A high-end independent fashion retailer, operating from a well-established location found itself experiencing severe financial difficulties, following the closure of all retail stores during the two nationwide lockdowns caused by the Covid 19 pandemic.
The retailer did not have a sizeable online practice when the pandemic forced the closure of its flagship store, and sales ceased overnight.
In addition, the retailer had already committed to deliveries of the next season’s stock, which resulted in large balances falling due to suppliers, whilst the stock remained unsold.
Kelly Burton, director and insolvency practitioner at Wilson Field, said:
“Unfortunately due to the pandemic, all of the retail stores had to shut as the country went into nationwide lockdown. Without a solid online presence, the flagship store had its sales effectively stop overnight.
We were pleased to arrange a pre-arranged sale of the business and its assets, which meant that nobody lost their job.”
The Directors approached Wilson Field to explore the option of a pre-packaged administration. Following an extensive marketing campaign, the business and assets were sold to an associated company, and all jobs were saved.
Care Homes Claims and MS2U
Kelly Burton • Financial Services • Pre-Pack Administration
Jobs have been preserved at a Leeds-based group of claims companies after they were bought out of administration in a pre-packed sale.
Care Home Claims and MS2U worked with customers who had been mis-sold financial products and services including PPI or had been over-charged on care home fees.
Joint administrators Kelly Burton and Lisa Hogg from Sheffield-based Wilson Field were called in by the directors when the group faced financial difficulties.
The business and assets of the companies were sold, for an undisclosed sum, to Acquire Inc Ltd. As part of the deal, 32 employees of an associated company transferred to the purchaser.
Group managing director Joseph Battle said:
“Problems were encountered as a result of an unprofitable contract and accrued HMRC arrears which lead to a severe cash flow shortage. We took professional advice and worked with the administrators to enable the business to continue as a going concern and preserve jobs of existing staff. Despite this being a very difficult time, the outcome means the business can continue.
“With the same management team, we can assure clients the same high level of service in the future.”
Kelly Burton, director and insolvency practitioner at Wilson Field, added:
“These companies ran into difficulty following the over calculation of work in progress on a contract, coupled with an accumulation of HMRC arrears. The directors contacted us for advice and have worked closely with us to achieve this result.
“We are pleased that the restructuring of these companies has resulted in the businesses continuing to trade via the successor business.”
LCP Pattern Book Makers
Kelly Burton • Manufacturing • Pre-Pack Administration
All 63 jobs at an Ilkeston company, which can trace its history back over a hundred years, have been saved following a pre-packaged sale. The original business operated by LCP Pattern Book Makers Ltd, which trades as Lee Colourplan Pattern Book Makers, started life in 1909 in the North of England, moving to Derbyshire in 1970.
Licensed insolvency practitioners Kelly Burton and Lisa Hogg both of Yorkshire-based insolvency specialists Wilson Field were appointed as Joint Administrators on 7th August 2017. The business and assets have been sold for an undisclosed sum to GB Patterns Ltd, a company managed by Gareth Bolsover, a former director of LCP Pattern Book Makers.
Kelly Burton, director and insolvency practitioner at Wilson Field said;
“The company enjoyed profitable trading in recent years but 2017 saw a 10% fall in turnover which created cash flow problems. This resulted in arrears with rent, HMRC and other suppliers.”
“GB Patterns Ltd bought the company with all 63 staff being transferred to the new company under TUPE. As well as saving jobs, the pre-packaged sale has mitigated employee termination claims estimated to total £414,018, resulting in a significantly better return to creditors”.
Kelly further commented;
“It is always good to see long-established businesses survive after facing difficulties. In this case with continued financial support from Regency Factors plc, we were able to work with all other parties to reach an outcome which would be in the best interests of creditors and at the same time preserve the business.”
Gareth Bolsover, owner of GB Patterns said;
“This has been an uncertain and very difficult period for the business but the continued financial support from Regency and advice from the administrators at Wilson Field has made the whole process less stressful. Working closely with them has meant we have been able to keep all 63 staff. The future now looks very positive.”
“With our strong reputation within our niche sector and with the same staff team, we are confident that the company has a viable future and is able to offer our customers the same high quality of products and service.”
The business will continue to trade from premises at Crompton Road, Ilkeston, specialising in the manufacture of fabric, wall/floor covering sample books, swatches, PVCU and cardboard binders, on behalf of manufacturing clients, including Colefax & Fowler and Laura Ashley.
Mark Wilkinson of Shulmans LLP, solicitors of Leeds advised and dealt with legal work with asset sales through Robert McArdle of David Currie & Co
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