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
Direct Entry Solutions
Kelly Burton • Transport & Logistics • Pre-Pack Administration
A Middlesex postal service company, whose facilities could handle around 30 tonnes of post a day, has been bought out of administration saving all 25 jobs.
The 13-year-old business, which initially traded as a consultancy service supplying postal services to UK-based wholesale mail companies, has been acquired by an associated company Direct Entry Solutions Worldwide Ltd 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 Direct Entry Solutions on 25 January.
The company had experienced a difficult trading period after diversifying from its core offering to incorporate the physical sorting of post along with returned mail management and various other mail processing services. This resulted in possible enforcement action by creditors including HMRC and the Austrian postal company Osterreichische Post.
The total value of the pre-pack administration deal is undisclosed but it includes the business and the assets of the company based on Stockley Close in West Drayton.
Kelly Burton, director and insolvency practitioner at Wilson Field in Leeds, said;
“The consequences of switching from a consultancy to processing mail involved significant investment and consequential increased ongoing costs.
“The company required a large boost in the staffing levels, a bigger premises in a more suitable location, relevant machinery and equipment for the warehouse operatives, in addition to large injections of cash.
“A number of onerous contracts also caused a pressure on cash flow and a build-up of historical debt.
“Our actions have secured all 25 jobs and brought about a better return to creditors. As the jobs were transferred to Direct Entry Solutions Worldwide, this alone saved over £27,000 in redundancy and wages.
“From what was a difficult situation has emerged a better result for creditors and staff.”
Derwent Castings Limited
Kelly Burton • Metals • Creditors Voluntary Liquidation (CVL)
Unsecured creditors owed money by a Derbyshire manufacturing company which went into liquidation are to receive a higher than the expected dividend of 60p in the pound.
A total in excess of £128,000 is due to be distributed to unsecured creditors of Whatstandwell-based Derwent Castings Limited, whose claims totalled over £192,000.
The company, whose roots date back to the 1940s, had traded profitably for a number of years but in late 2013 / early 2014 saw the cancellation of its largest sales contract which represented 70 per cent of its turnover.
Bosses at the company, which employed 16 staff including three directors, struggled to attract replacement business and had to drop prices. Further business was lost as a result of foreign competition.
Sheffield’s insolvency specialist Wilson Field was called in as liquidator and worked with the creditors’ committee of Derwent Castings Limited to secure the positive dividend.
Andy Wood, associate director and insolvency practitioner at Wilson Field said:
“Dividends for insolvent companies are generally low, or nothing, for a variety of reasons – cost of staff redundancies, difficulty collecting outstanding invoices, selling assets in a forced sale situation, selling specialist assets which have limited appeal to purchasers, deteriorating or perishable assets, as well as other costs involved.
“However, thanks to a very positive relationship with the creditors committee, I am delighted to return a healthy dividend to the unsecured creditors in the region of 60p in the pound.
“The supply chain is often greatly affected by a liquidation and in this case we have been able to help creditors.”
Derwent Castings Limited was incorporated in August 2002 and specialised in iron casting from the five-acre Derwent Foundry site at Whatstandwell near Matlock.
However, the iron founding operation at Derwent Foundry was first introduced back in 1946 by Wragg & Hawksley which produced cast iron pipes for the water industry.
In 1950 the foundry was acquired by WH Davis & Sons Ltd to supply castings for their railway wagon building business. Following a management buy out in 1984, the company was renamed Derwent Foundry Ltd and following its closure in July 2002, was bought by its present owners and renamed Derwent Castings Ltd.
Amongst jobs carried out on site were moulding using loose pattern and modern air setting (boxless) sand systems; metals work using the latest in electric induction melting producing a wide range of grey, SG and alloy irons; an independent Namas approved test laboratory, finishing, pattern making and machining facilities.
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.”
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