A Pre Pack (also known as Phoenixing) involves setting up a new company which buys the assets of one which is failing. The old company is liquidated and the new trades debt free.
- When to use a Pre Pack
- How to start this solution
- What does a Pre Pack cost?
- The affect on Directors
- What happens to company Employees?
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What is Pre Pack Liquidation?
Company Debt Expert James Falla describes a Pre-pack Administration or Liquidation. For more business debt advice visit www.companydebtadvice.net
When to use a Pre Pack
A Pre Pack is an option if directors believe in the future viability of their business plan. However they feel it is impossible to continue trading under the weight of the company’s current debts.
The directors or other investors may have access to funds. However they would prefer not to use these to pay debt. Instead they feel it would be better to set up a new company and acquire the assets of the old. The new company is solvent from day one and can operate free from debt.
In addition the old company may have legacy property leases or equipment Hire Purchase agreements which are no longer sustainable or required. The new company is not tied down by these agreements. It can choose to re-negotiate more favourable terms or ignore them entirely.
How to start a Pre Pack
The first stage of a Pre Pack is to set up a new company. This vehicle is then used to purchase the assets of the old. The directors also need to appoint an Insolvency Practitioner (IP).
The IP will assist in getting an independent valuation of the assets of the old company and help to draw up an appropriate sale and purchase agreement. The new company then buys the assets of the old. Any employees must also be transferred. It can then start to trade.
A creditors meeting is held to appoint a liquidator for the old company. This will normally be the IP appointed by the directors. The old company is then closed. The cash that has been raised from the sale of its assets is then be divided appropriately between its creditors.
What does a Pre Pack Cost?
There are a number of costs associated with a Pre Pack. A new company will have to be set up. In addition an independent valuation of the old company’s assets and the drawing up of a sale and purchase agreement will often cost between £1000-£1500.
Then funds will have to be made available to the new company to allow it to buy the assets of the old. Ideally the directors and shareholders of the new business will provide these either from their own pockets or by borrowing them. However it may also be possible to agree to pay the liquidator of the old company in instalments.
The liquidator will also have to be paid for closing the old company. Ideally this payment will be funded from the money received from the sale of the old company’s assets. If not the Directors of the old company will have to pay these fees.
Pre Pack and Directors
In a Pre Pack the Directors of the old company will normally set up and run the new business. Normally they will have no personal responsibility for the old company’s debts.
If the Directors owe money to the old company they will be liable to repay these debts once it is liquidated. The most common example of this type of debt is an outstanding Director’s Loan Account. In addition a director has given a personal guarantee against any of the company’s debts they will be liable to pay these.
The liquidator of the old company is required to investigate the conduct of anyone who has been a director of the company in the last three years. If the liquidator believes any director may be guilty of wrongful trading this must be reported to the Insolvency Service. If this claim is upheld the director could disqualified and even held personally liable for some of the company’s debts.
Pre Pack and Employees
In a Pre Pack under TUPE rules all employees of the old company must be transferred to the new business under their same terms and conditions of employment. The directors of the new company cannot pick and choose which employees to take with them.
If the new company does not need all the old employees it can make them redundant. However full account must be taken of their notice period and other employment rights based on their original contact and term of service.
If employees are dismissed without due care and attention to their employment rights they may have grounds to take legal action against the new company for unfair dismissal.