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
Crane Hire Business
Kelly Burton • Construction & Engineering • Pre-Pack Administration
The directors of a previously profitable crane hire business approached Wilson Field for advice following a significant downturn in turnover. The drop-off was caused by the nationwide lockdowns following the outbreak of Covid-19.
The business relied upon several large UK-based housebuilders for their income, who were also negatively impacted by the government restrictions.
The Directors attempted to restructure the business to minimise overheads. However, a winding-up petition was issued during this time, and with no funds available to pay the debt due, the Directors approached Wilson Field to explore the option of a pre-packaged administration.
After an extensive marketing period, a sale of the business and assets was achieved to an associated company, and saved all the jobs at the business.
Director and insolvency practitioner Kelly Burton said:
“The business was severely impacted when the country went into lockdown as lots of regular clients, were themselves unable to work and generate income. However, after working with the directors, we arranged a pre-pack administration, which saw the business and assets purchased, with all of the company’s employees keeping their jobs.”
LCP Pattern Book Makers
Kelly Burton • Manufacturing • Pre-Pack Administration
All 63 jobs at an Ilkeston company, which can trace its history back over a hundred years, have been saved following a pre-packaged sale. The original business operated by LCP Pattern Book Makers Ltd, which trades as Lee Colourplan Pattern Book Makers, started life in 1909 in the North of England, moving to Derbyshire in 1970.
Licensed insolvency practitioners Kelly Burton and Lisa Hogg both of Yorkshire-based insolvency specialists Wilson Field were appointed as Joint Administrators on 7th August 2017. The business and assets have been sold for an undisclosed sum to GB Patterns Ltd, a company managed by Gareth Bolsover, a former director of LCP Pattern Book Makers.
Kelly Burton, director and insolvency practitioner at Wilson Field said;
“The company enjoyed profitable trading in recent years but 2017 saw a 10% fall in turnover which created cash flow problems. This resulted in arrears with rent, HMRC and other suppliers.”
“GB Patterns Ltd bought the company with all 63 staff being transferred to the new company under TUPE. As well as saving jobs, the pre-packaged sale has mitigated employee termination claims estimated to total £414,018, resulting in a significantly better return to creditors”.
Kelly further commented;
“It is always good to see long-established businesses survive after facing difficulties. In this case with continued financial support from Regency Factors plc, we were able to work with all other parties to reach an outcome which would be in the best interests of creditors and at the same time preserve the business.”
Gareth Bolsover, owner of GB Patterns said;
“This has been an uncertain and very difficult period for the business but the continued financial support from Regency and advice from the administrators at Wilson Field has made the whole process less stressful. Working closely with them has meant we have been able to keep all 63 staff. The future now looks very positive.”
“With our strong reputation within our niche sector and with the same staff team, we are confident that the company has a viable future and is able to offer our customers the same high quality of products and service.”
The business will continue to trade from premises at Crompton Road, Ilkeston, specialising in the manufacture of fabric, wall/floor covering sample books, swatches, PVCU and cardboard binders, on behalf of manufacturing clients, including Colefax & Fowler and Laura Ashley.
Mark Wilkinson of Shulmans LLP, solicitors of Leeds advised and dealt with legal work with asset sales through Robert McArdle of David Currie & Co
L’Etranger
Kelly Burton • Leisure & Hospitality • Pre-Pack Administration
Administrators from Wilson Field have worked with bosses at a London restaurant to serve up a rescue deal. Kelly Burton and Lisa Hogg were appointed joint administrators on 10 July to South Kensington based L’Etranger Restaurant.
Established in 2002, the Gloucester Road restaurant, located near the Royal Albert Hall and London’s Museum Quarter including the Victoria and Albert Museum, the Natural History Museum and Science Museum, had been trading as L’Etranger Restaurant since 2010 benefitting from the prime location for visitors and theatre-goers.
However the company sustained a significant loss following the sale of a second restaurant in 2014 and experienced mounting cash flow issues with its retained premises resulting in HMRC arrears and the threat of a winding up petition.
Keane Hart Ltd, a company owned and managed by existing management team lead by director Ibi Issolah, has acquired the business out of administration for an undisclosed sum.
Kelly Burton, director and licenced insolvency practitioner at Wilson Field, said;
“L’Etranger had suffered losses in the past few years due to the previous loss-making sale of a second premises. Funds were spent on L’Etranger which absorbed further cash flow accruing HMRC arrears and the company being threatened with a winding up petition.
“The restructuring process has resulted in the continuation of a viable restaurant and the safeguarding of all the employees and ensures that the business is financially secure for future trading.
“Five jobs have been saved and transferred under TUPE to the new company.”
L’Etranger serves Japanese-influenced French cuisine, as well as maki and sashimi alongside offering a world-class wine selection. It has been awarded a number of accolades including an AA Rosette for Best Wine List in the UK 2013.
As well as seating 80 diners in the restaurant, L’Etranger offers wine tasting, private dining and events for up to 100 people on its premises.
Shulmans in Leeds advised and dealt with legal matters with Robert McArdle of David Currie & Co in Manchester assisting with asset valuation and disposal.
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