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.”
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.”
Rooster Punk Ltd
Kelly Burton • Media & Entertainment • Pre-Pack Administration
Advisors from Wilson Field have rescued a London headquartered advertising agency after it was bought out of administration by the existing management team.
Rooster Punk Ltd was established in 2012 and specialised in providing creative content for technology and financial services brands to better interact with clients and customers.
The company, which traded from head offices at Queen Victoria Street in London with a second office in Clifton Down Road in Bristol, called in administrators from Sheffield-headquartered Wilson Field for formal insolvency advice.
The company had experienced significant growth since set up and posted profits each year up to and including October 2016.
However loss of funds due to a bad debt combined with the termination of customer contracts and rising business overheads had created cash flow problems.
Kelly Burton (pictured) and Lisa Hogg from Wilson Field were appointed as joint administrators on December 6 and concluded a pre-packaged sale of the business and assets to Rooster Punk Group Limited lead by the same management team of Rooster Punk Ltd.
All remaining nine staff at the time of the sale were saved and transferred to the new company under TUPE.
Kelly Burton, director and licensed insolvency practitioner at Wilson Field said:
“Wilson Field considered the company’s precarious financial situation, which was borne as a result of a number of factors including the Samsung contract under billing, loss of funds due to a bad debt from a start-up, termination of customer contracts and rising business overheads.
“Despite attempts to cut back overheads, including reducing staff numbers from a peak of 24 down to 10, the directors recognised the company’s precarious position and sought formal insolvency advice from Wilson Field, and advice on alternative options available.
“The pre-packaged sale has mitigated employee termination claims in the nature of wage arrears, accrued holiday pay, redundancy and pay-in-lieu of notice totalling £33,680.
“It has preserved the value in the company’s intangible assets, namely its goodwill and work in progress and maximised the value of the company’s trade debtors due to the continuity of service to the company’s customers by the successor business.”
Valuations were handled by Robert McArdle of David Currie & Co with legal services and advice from solicitors Irwin Mitchell LLP.
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