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.”
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 HMRCs 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.
Transcar Trading Limited
Kelly Burton • Automotive • Pre-Pack Administration
Advisors from Yorkshire’s Wilson Field have saved 12 jobs at a Darlington low load haulier after it was bought out of administration.
Transcar Trading Limited specialised in collecting and delivering motor vehicles nationwide with its main clientele including major car dealers Bristol Street Motors, Lookers and Knaresborough Vauxhall.
The company, which traded from rental premises at Lingfield House Darlington and Macklin Avenue, Billingham, called in administrators from Sheffield-headquartered Wilson Field to look into the ongoing viability of the company and advise on a turnaround strategy.
After set up in 2015, it had experienced rapid growth within the last 12 months of trading and, coupled with a number of uncollected and disputed invoices, had created cash flow pressures and a build-up of arrears to HMRC.
Kelly Burton and Lisa Hogg from Wilson Field were appointed as joint administrators on November 27 and concluded a pre-packaged sale of the business and assets to Transcar Logistics Limited – wholly owned and managed by one of the directors and shareholders of Transcar Trading.
Kelly Burton, director and licenced insolvency practitioner at Wilson Field, said:
“As a result of the pre-packaged sale of the company’s business and assets to Transcar Logistics, 12 of the company’s 18 employees were transferred under TUPE, minimising preferential claims in wage arrears and accrued holiday pay.”
Valuations and advice on asset disposal was handled by Robert McArdle of David Currie & Co with legal services and advice from solicitors Ward Hadaway.
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