Is Pre Pack Liquidation a good Idea?

Pre Pack Liquidation is the process by which a new company starts trading in place of the old. The new company trades debt free and old is liquidated. The solution is criticised because creditors are seemingly short changed.

  • Is Pre Pack Liquidation a problem?
  • What are the real benefits of a Pre Pack?
  • Can Directors use a Pre Pack to avoid investigation?

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The Perceived Issues with Pre Pack Liquidation

Pre Pack Liquidation is often given a negative press. It seems that the process simply allows directors to start a new company. This carries on trading debt free while the creditors are left with unpaid debts. However this perception misunderstands the true nature of a Pre Pack.

A fact that is often overlooked is that the original company is failing. The business was insolvent and unable to pay its debts before the Pre Pack was started. The Pre Pack is not the reason for the problems. The closure of the company was already likely if not inevitable. As such creditors would always have been out of pocket.

A further criticism is that the assets of the old company are somehow stolen from under the nose of the creditors. It can seem that their sale to a new company is agreed without any consideration of the creditor’s interests. However over the past few years much has been done to address this issue.

In January 2009 strict guidelines for Pre Pack implementation were introduced. These are known as SIP 16. They ensure the interests of creditors are not ignored. Under SIP 16 proper market value is paid for assets. A full report of why this was beneficial to creditors must also be produced.

**Update** In November 2015 a revision of SIP 16 was introduced. This further strengthens the protection for creditors when a Pre Pack is implemented.

What are the real Benefits of Pre Pack Liquidation?

The benefits of a Pre Pack become clear when the solution is compared to a pure liquidation. Firstly if the failed business is simply closed any assets are likely to be disposed of in a fire sale. This will almost certainly result in a very poor return for creditors.

A Pre Pack will can deliver a better return. The value realised from the assets can be far higher if they are sold as a package to a new company that requires them to start trading.

The Pre Pack process also provides the opportunity for suppliers to continue trading with a new company. The simple closure of the old business would cancel out this potential. It is true that creditors are likely to have written old debts off. However relationships are maintained with a viable new business.

In addition the Pre Pack process gives a higher chance that jobs will be protected. Under TUPE rules the new company must hire the employees of the old. This may not result in all the jobs being saved. However the new business will have to fund the redundancy packages of staff it no longer needs. They are therefore in a far stronger position than if the company was simply closed.

A Pre Pack does not protect Directors from investigation

If a company is closed the Liquidator will report on the conduct of the directors. If they have not acted properly then the Liquidator will recommend further investigation by the insolvency Service. This could result in a director being disqualified.

Pre Pack Liquidation will not protect a director from this investigation process. The old company will be closed and the directors investigated as part of that liquidation process. If they have acted improperly they may still be subsequently disqualified.

Creditors should take heart from the fact that Directors cannot use a Pre Pack solution to try and avoid investigation. A disqualified director will not be able to be involved in the running of a new company set up as part of the process.

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