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
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.”
Bay Cleaning Solutions
Kelly Burton • Other • Pre-Pack Administration
Administrators from Wilson Field have helped safeguard all 245 part time jobs at a Welsh commercial cleaning company after it was sold in a pre-pack deal to existing management.
Joint administrators Kelly Burton and Lisa Hogg from Yorkshire-based Wilson Field were called in by directors of Swansea-based Bay Cleaning Solutions on 19 October 2017.
The company, based at Walter Road in Swansea, had seen significant growth over the last two years but increased direct costs and administrative expenses had rendered the company loss-making.
Cash flow problems had resulted in the accumulation of substantial tax arrears and other debt and despite attempts to seek increased borrowing and arrange a payment plan with HMRC, the company was placed into administration.
MRB Cleaning Limited bought the company with all 245 part-time staff being transferred to the new company under TUPE.
In saving all the jobs, Wilson Field mitigated employee termination claims in the nature of wage arrears, accrued holiday pay, redundancy and pay-in-lieu of notice which equates to almost £137,500, offering a better return to creditors.
Kelly Burton, director and insolvency practitioner at Wilson Field, said:
“We are pleased that the sale of the company to MRB has resulted in all 245 jobs being secured and that the business will continue to trade. This is a substantial number of jobs saved. We determined that a pre-packaged sale would be in the best interests of creditors.”
BCS has over three decades of experience in the field of commercial cleaning with its core business relying on high footfall premises such as pubs, clubs and restaurants.
It also worked in areas including commercial cleaning, specialist cleaning, building maintenance, student accommodation, end of tenancy, hard floor and domestic cleaning.
Robert McArdle of David Currie & Co of Manchester dealt with asset disposal while Shulmans Solicitors of Leeds handled the legals.
Mercer Group
Kelly Burton • Construction & Engineering • Pre-Pack Administration
All 38 jobs have been saved at a Bolton construction trade company after administrators at Wilson Field sold the company in a pre-pack deal to existing management.
Joint administrators Kelly Burton and Lisa Hogg from Wilson Field were called in by directors of Mercer Group on 7 July 2017.
The company, based at Turton House on Wellington Road in Bolton, had suffered due to serious underpayments from clients resulting in VAT and PAYE arrears and issues with HMRC.
Mercer Projects Ltd bought the company for an undisclosed sum with all 38 staff from across the group being transferred to the new company under TUPE.
As well as saving jobs, estimated redundancy and holiday pay totaling almost £97,000 were mitigated resulting in a better return to creditors.
Kelly Burton, director and insolvency practitioner at Wilson Field, said;
“We are pleased that the sale of the company to Mercer Projects has resulted in all 38 jobs being secured and that the business will continue to trade.
“We determined that a pre-packaged sale would be in the best interests of creditors.”
Director Alison Mercer said;
“This has been an uncertain and very difficult period for Mercer Group but advice from the administrators at Wilson Field has made the whole process less stressful. Their communication and procedure and working closely with them has meant we have been able to keep all 38 staff.
“With our strong reputation within the sector as a multi trade company and with the same staff team, we were confident that the company has a viable future.”
Alison added;
“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 Mercer Projects now looks very positive and we are in a position to offer our customers the same high quality of products and service.”
The companies began as Mercer Brothers Limited in 2004 and D Mercer and Sons Ltd in 2009 as plastering only businesses and quickly evolved through training and business expansion into a multi-trade company, to become known as Mercer Group.
During a period of quadruple growth between 2012 and 2013, the company relocated its offices to Bolton and undertook work in both the public and private sectors including residential, educational, medical and commercial properties.
Areas of expertise included demolition, plastering, screeding, tiling, flooring, joinery, painting and decorating, structural and ground works and roofing.
It also worked in partnership with a number of local colleges and schools to provide apprenticeship schemes for 16-24 year olds to gain experience, skills and qualifications in the construction industry. Mercer Projects has continued to provide apprenticeships and currently has 4 apprentices who are working on our construction sites.
Gosschalks Solicitors of Hull advised and dealt with legal work with asset sales through Ian Maycock of Charterfields Surveyors in Manchester.
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