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
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.”
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.”
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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