Pre Pack Advantages and Disadvantages

If you are considering a Pre Pack you first need to consider some of the main advantages and disadvantages. Each of these may or may not be relevant to your company depending on the specific circumstances.

Pre Pack Liquidation Advantages and Disadvantages

Company Debt Expert James Falla discusses the Pro's and Con's of a Pre-pack Administration. For more business debt advice visit www.companydebtadvice.net

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Advantages of the Pre Pack Solution

1. New company trades debt free
The new company formed as part of the Pre Pack process is debt free. It can start trading without the burden of having to repay the debts owed by the old business. In addition it has a clear credit rating. Any CCJs which may have been issued against the old company are not transferred to the new.

2. New investment focused on building new business
The Pre Pack process allows investment to be used by the new company. There is no risk these funds will be used to pay old debt. This is left with the old business. Instead the funds are used for business development.

3. Client goodwill preserved
The Pre Pack process allows a seamless transition between the old company and the new. This means that continuity can be preserved for existing clients. The goods or services they receive and the people who deliver these can remain the same. As such with proper management company goodwill should be maintained.

4. Employees and teams maintained
When using a Pre Pack solution all employees are transferred to the new company under TUPE rules. Redundancies may be required as a result of cost cutting. However it is possible to maintain employees and teams where they are required.

5. Better return for creditors than Liquidation
A Pre Pack involves the sale of the old company’s assets to a new enterprise. Normally all the assets will be required for the new company to start trading. This should mean that the maximum amount is generated from the sale for creditors. If the company was simply liquidated and assets sold off piecemeal the amount generated would likely be less.

Disadvantages of the Pre Pack Solution

1. Investment funds are normally required upfront
To implement a Pre Pack funds are normally required upfront to purchase the assets of the old company. The directors usually have to provide these funds. Having said that a cash flow problem may be overcome if agreement can be reached to pay for the assets from ongoing trading revenues of the new company.

2. Directors conduct may be investigated
A Pre Pack results in the old company being liquidated. The Liquidator will be required to complete a report on the conduct of the directors of this company. This is then submitted to the Insolvency Service. Where misconduct is identified this may then be further investigated. If proved the director involved could be disqualified.

3. HMRC VAT deposit may be required
If the directors of the new company are known by HM Revenue and Customs to have a history of non payment of VAT and other taxes, the VAT registration of new company may be blocked by HMRC without a security deposit.

4. Creditors left with unpaid debts
After the completion of the Pre Pack process it is likely that the creditors of the old company will be left with unpaid debts. The knock on affect of this may cause them to fail as well.  Nevertheless it is not the Pre Pack itself that is the cause of these problems. Given the old company is insolvent the alternative to the Pre Pack would normally be standard liquidation. This would be likely to leave creditors in an even worse position.

5. Pre Pack cannot be used to restructure employees
TUPE rules govern the employment rights of employees affected by Pre Pack Liquidation. As such the solution cannot be used as an employee restructuring tool. If any employees are not required the new company can make them redundant. However this must be done with regard to their full employment history and rights transferred from the old business.

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