A Pre Pack is a company debt solution. A new company is set up which buys the assets from the old. The new then starts to trade debt free. The old company is liquidated.
- How does a Pre Pack work?
- What happens to Company Debt
- Will the company Credit Rating be affected?
- How will HMRC react to a Pre Pack?
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
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How does a Pre Pack Work?
A Pre Pack works by starting a new company which then trades in place of the old one. The new business has a better chance of success as it is debt free. All its resources can therefore be used for business building rather than debt repayment. All the debts remain with the old company.
If it wants to use them the new company must buy the assets of the old. The assets may not just be physical. They could include client lists, ongoing contracts and websites. A fair market rate must be paid. An independent valuer will have to be used to ensure this rate can be justified if it is queried by any of the company’s creditors.
The old company is normally closed using the process called Creditors Voluntary Liquidation (CVL). The amount raised from sale of its assets will first be used to pay the liquidator’s fees. Any remaining funds will be shared between the unsecured creditors. They will be unlikely to recover everything they are owed.
What happens to the old Company Debt in a Pre Pack?
If a Pre Pack is used the original company will be closed. Any creditors who are owed money will then have to deal with the Liquidator. Generally there will be insufficient funds to repay them in full.
The creditors will have to bear the cost of their unpaid debts. They are not allowed to claim against the new company. They will only be able to claim against the company directors if any have given personal guarantees.
The treatment of creditors in a Pre Pack may seem harsh. However the fact that the old company’s assets are sold to a willing buyer should generate the maximum value.
Creditors are likely to see more of their debt repaid using a pre pack then if the company had simply been liquidated and its assets disposed of in a fire sale.
How does a Pre Pack affect the Company Credit rating?
The new company set up as part of the Pre Pack process will not inherit the previous company’s credit rating. This is an advantage if the old credit rating was poor.
However it means that it will have to start building up its own credit history. It is therefore unlikely to be able to get significant credit facilities initially unless it has assets against which borrowing can be secured.
Suppliers of the new company are likely to be cautious. This will almost certainly be the case if they had outstanding debt which the old business did not pay. It may be that some suppliers will only trade with the new company on a cash on delivery basis.
How will HMRC react to a Pre Pack?
If the new company set up as part of the Pre Pack process is likely to have revenues above the VAT threshold, registration with HMRC will be required. HMRC may then demand that a security deposit is paid before a registration number is issued.
This situation often happens where the directors of the new company are known by HMRC to have failed to pay VAT or company taxes in the past.
Directors of the new company should anticipate the need for a VAT deposit if their old company owed debt to HMRC. The required deposit is likely to be equivalent to 4-6 months of the old company’s VAT liability. It is important that this budget is incorporated into the new company’s forecasts and funds made available to pay it.