Pre Pack Liquidation may be used if a company cannot pay its debt but has a viable business plan. The solution can help overcome unwanted property and equipment leases. What if a Winding Up Petition has been issued?
- When is Pre Pack liquidation an ideal Company Debt solution
- Find out how a Pre Pack can be used to overcome unwanted property leases
- What are the liabilities of Directors in Pre Pack Liquidation?
- Can a Pre Pack protect against a Winding Up Petition?
When to use Pre Pack Liquidation
Company Debt Expert James Falla talks about when it is possible to use a Pre-pack Administration. For more business debt advice visit www.companydebtadvice.net
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Use Pre Pack Liquidation if the Directors still believe in the Business Model
Pre Pack Liquidation could be the answer if a company cannot pay its debts but the directors and shareholders still believe in the business model. Despite this however they are not prepared to put more cash into the business for it to be simply swallowed up by debt repayments.
In a Pre Pack investment money to be used to set up a new company. This then buys the assets of the old and starts trading in its place. It then has the opportunity to make profits and pay dividends without the burden of debt repayments. The old debts are dealt with through the liquidation of the old company.
Pre Pack Liquidation will not help if the market no longer exists or can never be profitable even for a company without debt. In this situation there would be little point in buying the assets of the old business in order to continue trading.
Overcome unwanted Lease Agreements with a Pre Pack
Pre Pack Liquidation can successfully overcome unwanted property and equipment lease agreements. Because the new company is not party to the old agreements it is not obliged to honour them.
The new company has the option of either re-negotiating the agreements with more favourable terms or simply ignoring them altogether.
This is particularly useful in the case of long onerous property lease agreements. The old company may be tied into a property lease that is due to last for another 10 years. The new can simply walk away from these and find alternative premises if it wants. The debt associated with the lease is owed by the old company and dealt with when it is liquidated.
Directors must understand the implications of the Pre Pack solution
There are a number of ways that the directors of the old company can be affected by Pre Pack Liquidation. Firstly once its assets have been sold the old company will be liquidated. The liquidator will have to report on the conduct of the directors to the insolvency Service. If they are accused of any wrongful trading they could be struck off as directors and even held liable for company debts.
Secondly the Directors must take care that they do not owe money to the old company in the form of loan accounts. If so they will become liable for repaying this debt to the liquidator. If they are not able to afford to do this they must have a plan in place for dealing with this debt.
Thirdly once the old company is liquidated the Directors will become liable for any guarantees they have given to pay its debts. With smaller companies it is common for Directors to have given personal guarantees against bank debt and property leases. Where these debts are large they can then cause significant issues.
Can a Pre Pack be used to dismiss unwanted Employees?
As a result of having to cut costs a company may have too many employees. However carrying out Pre Pack Liquidation will not absolve the company of its responsibilities to employees and the cost of redundancy.
Under the EU TUPE regulations (Transfer of Undertakings and Permanent Employment) employees with their accumulated rights such as holidays, redundancy entitlement etc. must be transferred to the new Company.
For this reason a Pre Pack cannot be used as a vehicle to reorganize a company’s staff without following a proper and formal redundancy process. The new company does not have to employ all the old employees. However the redundancy process must take into account their previous terms of employment and term of service.
Will a Pre Pack stop a Winding Up Petition?
Pre Pack Liquidation is not a suitable solution where a Winding Up Petition has already been issued against the company. For a Pre Pack to work the company must be capable of selling its assets.
If a Winding Up Petition has been issued the trading of the company’s assets must be suspended. No assets can be sold or shares transferred without the prior agreement of the Court.
It will therefore be impossible for the directors sell assets to the new company prior to a liquidator being appointed. It is only possible for assets to be sold once a liquidator has been appointed by the Court.