Pre pack liquidation is the process of closing a limited company. But at the same time, starting a new one to take its place. The new business is able to trade debt free.
Included in this article:
- What is pre pack liquidation?
- How do you start?
- What happens to outstanding company debts?
- Can you use the company assets?
- What happens to your employees?
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What is pre pack liquidation?
Pre pack liquidation can be used where your company can’t pay it’s debts and has to stop trading. But despite this, you believe the business can still work.
You therefore set up a brand new company to trade in the old one’s place.
All the debts are written off when the old company is liquidated. The new is then able to trade debt free. It therefore has a better chance of success because all its resources can be used for business building. It does not have to repay the old debts.
The process has to be carried out carefully to ensure your actions can’t be challenged later by the old creditors. For example the new company can use the old business’s assets. However, these must be correctly purchased from the liquidator.
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How do you start pre pack liquidation?
There are two parts to pre pack liquidation.
Closing the old company
The old company has to be liquidated. You start this process by appointing an Insolvency Practitioner (IP).
The IP will produce a statement of affairs and call a creditor meeting to appoint the liquidator. The liquidator will then start the business of closing the company.
Liquidating the company involves the liquidator realising as much money as possible by collecting outstanding invoices and selling assets. They also terminate any lease agreements and make all the employees redundant.
The liquidator also produces a report on the conduct of the directors for the Insolvency Service.
Setting up the new company
A new company has to be incorporated at Companies House. Generally speaking it can’t use the same or a similar name. However, it might be possible to buy the old company name from the liquidator.
Usually, you can be the director of the new company. The only time this is not an option is if you are disqualified as part of the liquidation process. Or, you may be planning to go bankrupt to deal with personal guarantee debts.
If you are no longer able to be a director for any reason, someone else can take on the role. There is nothing to stop you working for the business as an employee.
You might want to stay in the same premises where the old company was located. This is an option. However, you will need to negotiate a new lease with the landlord in the name of the new business.
In pre pack liquidation, setting up the new company is usually done at the same time as liquidating the old.
What happens to outstanding company debts in pre pack liquidation?
When your old company is liquidated, any debts it owes to banks, suppliers and even HMRC are written off.
In theory, the liquidator will use funds raised from selling company assets to pay creditors. However, in reality, there are often little or no funds available for repaying debt because there aren’t sufficient assets to sell.
The new company (set up as part of the pre pack liquidation) is not liable to for any of the old business debts.
That said, as a director of the old company, you might be personally liable for some of its debts. This will be the case if you have given any personal guarantees. You may also be liable for any part of a bounce back loan you used personally.
You also need to look out for an overdrawn director’s loan account (DLA). This is where you have borrowed money from the old business or taken money you weren’t entitled to. You are personally liable to repay this debt to the liquidator.
If you have personal liability for debts after company liquidation, speak to us about suitable personal debt solutions. Call 0800 180 8440 or complete the form below. The advice is free and confidential.
Can you use the old company assets?
You might want to use some or all of the assets owned by the old company in your new business. This could be anything from a vehicle to materials or even ongoing contracts.
Things you want to continue using need to be purchased. The liquidator will manage this as part of the pre pack liquidation process.
Before any deal can be done, they will arrange an independent valuation of the assets. This is to ensure you pay a fair market price which can’t be challenged by disgruntled creditors later. This is particularly important if HMRC are a major company creditor.
Ideally, the items will be paid for by the new company. However, you can also pay for them personally using your own funds if you wish.
You must not just take assets from the old company before it is liquidated. If you do, the liquidator will demand they are either paid for or returned. You could also face a fine, possible disqualification and in serious cases, criminal prosecution.
What happens to your employees?
The pre pack liquidation process means that your old company will be closed. As a result, the liquidator will make all the employees of the old business redundant.
If sufficient funds are available from the company assets, redundancy payments will be made.
Where redundancy payments can’t be funded, employees (and company directors) can a claim with the government’s Redundancy Payments Service. The liquidator should be able to provide advice n how to access this service.
Your new company can hire employees that use to work for the old one if you like. However, you are not obliged to take them on.
You don’t have to match the contracts that employees had with the old company. These were terminated as part of the liquidation process.
Want help with pre pack liquidation? Call us (0800 180 8440) or complete the form below. The advice is free and confidential.