What is a Pre-Pack in Insolvency?

What is a Pre-Pack in Insolvency?

  • Post published:15/04/2021

pre-pack liquidation is a commonly used, informal term where a newly-formed company (sometimes referred to as a phoenix) purchases the assets of an existing company which is then liquidated.

Is a pre-pack liquidation appropriate?

To start the process of a pre-pack liquidation, a company must be considered insolvent and under threat from pursuing creditors. Where it may be possible to trade out of the situation, other insolvency procedures such as a Company Voluntary arrangement (CVA ) or refinancing may be more appropriate.

However, if it is clear that the company has a profitable core business, but pressure from creditors is threatening its existence, then a pre-pack liquidation could be the way forward. Pre-pack liquidation may be appropriate where the company:

·       Has a good business model with a full order book but has severe cash flow problems.

·       Is suffering from creditor pressure that could result in the seizing of assets or other actions.

·       Can be profitable but is hampered by historical debts.

·       Has suffered a bad debt and this has affected the health of the company.

Your company may qualify for a pre-pack liquidation if it is unable to repay debts as and when they fall due but crucially the core business is still profitable.

What are main benefits of a pre-pack liquidation?

A pre-pack liquidation enables the business to continue through a phoenix company and provides a swift secure and planned transition of the business. Importantly it can provide a better return for creditors, rather than a straightforward liquidation. Creditors may not see a return on certain intangible assets, but they can recover funds on sales such as goodwill, web sites and databases. The newco, will also be free of all debts related to oldco and will have the possibility of employing some staff who were previously employed by the old company.

In theory a pre-pack liquidation has lots of benefits. Without the burden of historical debts, the newco should have a much greater chance of survival, with any new investments being used to fund operations of the new company as opposed to settling debts.

What is the pre-pack liquidation process?

The pre-pack liquidation process is relatively simple and straightforward for the majority of companies which go through this procedure. The process is very similar to that of a Creditors Voluntary Liquidation (CVL) , however, it has one major difference.

Like most formal insolvency procedures, it begins by meeting with a consultant and going through what’s involved. After this, an insolvency practitioner will be formally engaged and act as your proposed liquidator who will then deal with any letters and phone calls from creditors. The insolvency practitioner will then write to your creditors and provide details of date, time and place in order to arrange a creditors meeting. Since the Insolvency Rules 2016, physical meetings are the exception and instead virtual meetings using such as video links or conference calls are the norm unless creditors object. Decision-making can be made in a variety of ways including the use of electronic voting or correspondence.

Creditors must have at least seven days’ notice and shareholders 14 days. Seven days prior to the meeting there must be advertisement in the London Gazette. As part of the liquidation process, directors should prepare a Statement of Affairs, which the insolvency practitioner will help with, so it’s ready to present at the creditors meeting.

There will be two separate meetings which take place. The first, a shareholder meeting passes a special resolution which requires a minimum of 75% of the members present to approve. In this meeting they will consider who to appoint as liquidator and consider resolutions to put the company into a CVL. After the shareholders meeting, there will then be a creditors meeting, where they will then cast a vote over the appointment of the liquidator. There must be over a 50% majority for the decision of liquidator.

Once the liquidator is appointed, he will carry out all normal duties, except carrying out the realisation of company assets, which should have already been done in a pre-pack liquidation by shareholders. The liquidator will consider company activities in the period prior to the liquidation to ensure that any asset disposals have been made at market value in the circumstances, to ensure the best return to creditors has been achieved.

The use of a pre-pack liquidation, allowing you to set up a phoenix company is perfectly legal. Following the formal insolvency process which sees the oldco closed down, all regulations will have been met and all creditors will have been appropriately dealt with. Directors of the newco must acquire all assets at market value, as setting up a phoenix company to transfer assets from an insolvent company for a reduced fee would be classed as a fraudulent transfer.

In summary

Pre-pack liquidation is a formal insolvency procedure, which essentially closes down an old company, whilst opening up a new business in its ashes. It carries a very similar formula to a CVL, with a few differences that enable a new company to start trading under a different name.

How can we help

If you’re looking to start the process of a pre-pack liquidation, Lucas Ross – Business Rescue, Recovery & Insolvency have a number of licensed insolvency practitioners who will be able to take you through the process and discuss if it’s the right option for your business. If appointed as liquidators, we will put in place any processes that need to be completed in order to close the old company and open the new company. If you need any further advice or support, then contact us at help@lucasross.co.uk.