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 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 from the sale of assets such as goodwill, websites 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 in place to go through the process of selling assets. Our expert advisers can take you through all the available options and offer free, confidential advice.

Case Studies

Scottish Pub Chain

Kelly Burton • Leisure & Hospitality • Pre-Pack Administration

The director initially approached Wilson Field for assistance with the drafting of a Company Voluntary Arrangement (CVA), following HMRC’s refusal to allow the company a time to pay agreement. Wilson Field drafted a CVA proposal, which was rejected by HMRC, who then issued a winding-up petition.

Wilson Field then advised the director to his remaining options, of which placing the company into Administration was one.

Due to the petition, the director was unable to appoint administrators. However, following protracted discussions with the company’s debenture holder, it was agreed that the secured creditor would appoint Wilson Field, at the request of the director.

Insolvency practitioner and director at Wilson Field, Kelly Burton, said:

“After being refused a CVA by HMRC, the company received a winding-up petition and we were appointed Administrators after speaking with the debenture holder.

Although it was a tricky start, there was a good outcome as the assets and business were sold and 75 employees kept their jobs.”

A licence to occupy was granted to an associated company to trade the pubs, whilst a sale could be finalised post appointment.

The sale was completed to an associated party a number of months after appointment, and secured over 75 jobs.

Consortia Service Group

Kelly Burton • Service Agency • Pre-Pack Administration

A Cardiff security specialist has been bought out of administration saving all 44 jobs.

Zenith Security Specialists Limited was set up in 2009 providing manned CCTV security systems to national and private firms, local authorities and small businesses.

Trading as Consortia Service Group, the company was based at Cardiff Bay Business Centre and was taken over in January 2015 by director Ozma Nasir with a view to expanding the business.

Administrators Kelly Burton and Joanne Wright from Sheffield business turnaround experts Wilson Field were appointed joint administrators on 17 May after the company faced mounting pressure from HMRC in respect of PAYE and VAT arrears.

Miss Masir took advice from Wilson Field and the business was sold in a pre-pack administration to Consortia Services Group Limited as a going concern saving all 44 employees’ jobs.

Kelly Burton from Wilson Field said:

“Unfortunately, a number of the inherited on-going contracts were unprofitable. Despite attempts, the company did not have sufficient time to turnaround the business and was struggling to service both its on-going overheads and significant HMRC liabilities.

“Attempts were made to source further additional funding proved impossible and so the decision was taken to enter administration.

“Following discussions with the director, the business was sold as a going concern, safeguarding all 44 employees’ jobs and offering a better return for the company’s creditors than alternative options.

“The new company will be under the same management offering the same standards of service to its customers.”

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 presence 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.

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