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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.

However, there can be some benefits to the process of a pre-pack liquidation sale; these include:

  • 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 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.
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If you manage a company and think a pre-pack liquidation may be the right choice for your company, you should be aware that there are some downsides to this insolvency procedure, particularly for the newco. These include:

  • 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 for the last three years is examined to determine any potential wrongdoing.

If your company is struggling financially, whether you are interested in a pre-pack liquidation or not, get in touch with us on 0800 901 2475 as soon as possible. A pre-pack liquidation is not always the right answer for every businesses so contact us now and one of our advisers will be happy to explain the various options available.

Authored by Phil Meekin

Phil Meekin

Head of Marketing