Advantages and Disadvantages of a Pre Pack

A pre-pack liquidation allows a new company to buy the assets of an insolvent company before the company goes into liquidation.

The insolvent company's assets are generally bought by the Directors of the company and they continue to trade under a new company name. Entering down this route needs to be thought about carefully, what are the reasons that your business has got into difficulty and what changes can be made to ensure that it doesn't happen again, also will a pre-pack liquidation be in the interests of the creditors of the company?

If you are considering entering into a pre-pack there are a few things that you need to consider.

Here I am going to give an overview of the advantages and disadvantages of a pre-pack

ADVANTAGES OF A PRE - PACK

The business continues

The company can experience no interruption of trade, ongoing work continues, money that is owed can continue to be collected and you can continue to work without the debt burden of the previous company holding you back.

The new company starts again debt-free

Your new business is debt-free, it can start trading without having to repay the old debts, any enforcement action against the old company will now be handled by the liquidator.

You can start thinking about the future

When a company is in financial difficulty it can be very hard for the directors to focus on anything other than the creditor pressure, pending legal action, bailiffs, and cashflow problems, in a pre-pack liquidation the business has a new start, and the directors can once again focus on the future and building the business up again.

Save employee's jobs

Saving peoples jobs is normally one of the key reasons to enter into a pre-pack liquidation, all employees can be transferred from the old company into the new company. Redundancies may also be needed to be made from the old company, if this is the case the employees can make a claim for redundancy from the Government.

Your creditors get a better return.

In a pre-pack, the new company agrees to buy the assets of the old company. The money realised for the sale goes as a return to the old companies creditors. If the company is just liquidated and the assets are sold off individually then the return to creditors is generally less

Pre-packs are sometimes seen as controversial and that the company directors are trying to avoid paying the company debts, the fact remains that pre-packs are widely used in the UK and they are governed by strict regulations. They have a large number of big names that have used this procedure in the past few years.

DISADVANTAGES OF A PRE PACK

Directors Conduct

When the old company is placed into voluntary liquidation the insolvency practitioner will put together a report on the director's conduct leading up to the point of insolvency. If the director's conduct is deemed to be improper they could still be open to an investigation or prosecution.

Creditors left with unpaid debts

Once the old company is placed into liquidation it's likely that creditors still will be left with unpaid bills, even when the assets are sold and a return is paid to the creditors they could be left owed considerable money. You may struggle to work with that supplier in the future and they may refuse to deal with your new company.

HMRC may want a deposit

If you have had a history of not paying HMRC VAT and other taxes they may ask for a security deposit when you try again to register for VAT.

As always if you have any questions please let me know,

Thanks,

Chris