When to use a Pre Pack

A Pre Pack may be used if a company cannot pay its debt but has a viable business plan. However there may be implications for directors who owe money to the business.

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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When should a Pre Pack be used to solve Company Debt?

A Pre Pack could be the answer if your company cannot pay its debts but the directors and shareholders still believe in the business model.

Instead of putting more cash into the failing business a Pre Pack allows available investment cash to be used to set up a new company. This then buys the assets of the old and starts trading in its place.

The new company 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 will not help if the market no longer exists or can never be profitable even for a company without debt.

Overcome unwanted Lease Agreements with a Pre Pack

A Pre Pack 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.

Can a Pre Pack protect against a Winding Up Petition?

A Pre Pack is not a suitable solution where a Winding Up Petition has already been issued against the company. For it to work the company must be capable of selling its assets.

If Winding Up proceedings have already started 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.

What are the Liabilities of Directors if a Pre Pack is used?

There are a number of ways that the directors of the old company can be affected by a Pre Pack. Firstly because the old company is liquidated a report on the conduct of the directors must be completed.

If the liquidator feels they have acted improperly they must report this to the Insolvency Service. Their conduct may then be investigated and could lead to them being disqualified as directors and even liable for company debts.

Directors must take care that they do not owe money to the old company. If there are outstanding directors loan accounts they will become liable to repay these.

In a Pre Pack Directors will become liable for any guarantees they have given to pay the old company debts.

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 a Pre Pack will not absolve the company of its responsibilities to employees and the cost of redundancy.

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.

Under TUPE regulations (Transfer of Undertakings and Permanent Employment) employees with their accumulated rights such as holidays and redundancy entitlement must be transferred to the new Company.


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