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Pre pack administration offers the opportunity to start a new limited company without pressure of debt. This is a popular solution for insolvent companies, with specific requirements in place to safeguard creditor interests.

It is incumbent on the Insolvency Practitioner to demonstrate that no better options exist with respect to creditor returns.

Begbies Traynor can advise on whether a pre pack administration is suitable for your business. We offer same day consultations free of charge.

How does pre pack work?

  • Business assets are professionally valued at a fair market price
  • Negotiations for their purchase take place before a liquidator is appointed
  • The sale is open to third party, trade buyers, and existing directors
  • Sale of the assets takes place shortly after the appointment of a licensed Insolvency Practitioner

The speed of sale ensures little loss of trade and minimal bad publicity for the new company. Buyers need to prove their ability to purchase the assets, however, and if personal funds are not available, asset-based lending may be an option for directors.

What happens to the old company?

The original company is liquidated, and any remaining debts after monies have been distributed are written off. A legal requirement for Insolvency Practitioners to maximise creditor interests and demonstrate that pre pack administration brought the highest returns addresses any negativity surrounding this option.

It is in suppliers’ interests to continue trading with the new company, although this is likely to be on a pro forma invoice or cash payment basis rather than on credit.

  • What are the benefits of pre pack administration?
  • Creditor action is stayed once the process is underway
  • Transition between the old and new companies is seamless in many cases, helping to preserve brand reputation and customer goodwill
  • The existence of TUPE regulations - Transfer of Undertakings (Protection of Employment), allows for the transfer of staff employment contracts to the new company
  • The quick sale of assets may bring with it increased dividends for creditors, when compared with those achievable on liquidation

Are there any disadvantages?

  • The conduct of all directors will be investigated. If any issues are uncovered, directors may face disqualification and/or personal liability for company debts.
  • Taking on existing employment contracts under TUPE can be a financial burden for a new company. This is unavoidable, however, where job roles are to be continued.
  • Directors may find it difficult to fund the purchase of assets from personal finances
  • A widespread perception that directors have avoided their responsibilities to creditors can influence trade if the purchase does become public knowledge

Specific concerns for directors when undertaking pre pack administration

Starting a new company without the stress of debt sounds ideal, but issues such as personal liability should be taken into consideration.

Allegations of wrongful trading

The Insolvency Service investigates the conduct of all directors in the months leading up to insolvency. They will identify the issues that led to this situation, how directors dealt with the problems, and whether wrongful or unlawful trading took place.

If you fear allegations of this type or are not sure whether you have traded wrongfully, we can establish the facts of your situation.With offices the length and breadth of the UK, Begbies Traynor provides guidance on these matters prior to the valuation of assets and marketing of the business.

The ramifications of unfit conduct and unlawful trading are serious. Disqualification as a director for up to 15 years can result, in addition to personal liability for company debts. In the most serious cases a prison sentence may be handed down.

The requirement to place creditor interests first

On realisation that your company is insolvent, you must put creditor interests ahead of your own and those of shareholders. This means:

  • no new injection of capital into the business
  • no assets should be sold
  • the assistance of a licensed Insolvency Practitioner must be sought

Public perception of a ‘phoenix’ company

The newly-established business is sometimes referred to as a ‘phoenix’ company, having risen from the ashes of the old one. Public view of this procedure is not always positive, however, which can affect the success of the new business.

Additionally, creditors may feel that their position has not been considered sufficiently, but it is often the case that supplier relationships continue successfully with the new company due to the absence of debt pressures.

Winding up petition

If your company has received a 21-day Statutory Demand for Payment, you will need to act quickly. The arrival of a winding-up petition may be imminent, in which case pre pack administration will cease to be an option.

Begbies Traynor is the leading UK insolvency practice, and operates from local offices. Contact a member of our team to arrange your free same day consultation.

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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