There are a number of steps required to start a Pre Pack. These include setting up a new company which purchases assets from the old. The new business can be running within 3-4 weeks.
- Start a new company
- Agree Sale and Purchase Agreement
- Liquidate old company
- Transfer leases and HP agreements
- Transfer employees
Implement Pre Pack Liquidation
Company Debt Expert James Falla discusses the process of implementing a Pre-pack Administration. For more business debt advice visit www.companydebtadvice.net
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Start a New Company
To start a Pre Pack a brand new company first has to be set up. This will eventually be used to trade in place of the old business. The directors can be the same, new or a mixture of old and new.
The name of the new company must be different to that of the old. It can be similar. However it must not be so similar as to suggest an association with the old company.
If the revenues of the new company are likely to exceed the VAT threshold then it will need to apply for VAT registration. HMRC may request a security deposit where the directors are known by HMRC to have failed to pay VAT or company taxes in the past.
If HMRC require a security deposit this will normally be the equivalent to 4-6 months of the old company’s VAT liability.
Agree Sale & Purchase Agreement for old Company Assets
The directors of the old company must arrange for a valuation of its assets. This will normally be done with the help of an Insolvency Practitioner. The valuation must be independent and reasonable. The company’s creditors may require proof that a fair market rate was generated from the sale of the assets.
The assets of the company will not just include any physical items of equipment. They will also include any customer database, ongoing client contracts, websites and IPR owned by the company.
Once the assets have been valued a sale and purchase agreement between the new and old company can be drawn up. This will detail the price to be paid and the payment terms. However the assets cannot be purchased by the new business until a Liquidator is appointed to close the old one.
Liquidate old Company
A key element of the Pre Pack solution is the closure of the old company. This is achieved through the liquidation process known as Creditors Voluntary Liquidation (CVL).
The directors of the old company must appoint an Insolvency Practitioner (IP). The IP will then call a creditors meeting where the Liquidator is appointed. Normally the IP will be appointed as Liquidator.
The liquidator will then go about closing the company and dealing with the outstanding creditors. They will also sell the assets to the new company as per the terms of the pre agreed sale and purchase agreement. They are responsible for collecting the agreed payment and any other debts owed to the company.
The liquidator will conduct a report on the conduct of the old company directors. If they feel any director is guilty of wrongful trading this will be reported to the Insolvency Service who may chose to investigate further.
Transfer Leases and Hire Purchase Agreements to new Company
The new company does not have to take on any lease agreements held by the old. If the directors want to stay in the same premises they will have to negotiate a new lease agreement. This can be a considerable advantage if the terms of the old lease are no longer appropriate.
If the old company owned freehold property this may be sold to the new company or a 3rd party buyer. If it does not want to buy the property the new company may be able to rent it under license from the Liquidator until the premises are sold.
Where the old company had Hire Purchase agreements then in the same way as leases the new is not obliged to take these on. The associated goods will normally be returned to the HP company. The new company will then need to make its own arrangements to purchase any new equipment it needs.
Transfer of Employees to new Company
Under the rules of TUPE (Transfer of Undertakings and Permanent Employment) if you use the Pre Pack solution anyone who was employed by the old company must be transferred to the new.
All employees retain their original contract terms and any rights such as holidays and terms of service.
It is likely that the directors will want to organise the new company differently and make various cost savings. If as a result they decide to make employees redundant this must be done based on the employee’s rights as if they were still employed by the old business.
The new company must be very careful to follow the correct redundancy process. If this is carried out incorrectly any affected employees may have grounds to sue the new company for unfair dismissal.