Pre Pack Administration for a fresh start if your company has large outstanding debts and significant assets
Pre Pack Administration is a process whereby the directors of an insolvent company start a new business which then buys the assets of the old failing business. Instead of putting additional resources into an already insolvent company the directors are able to use the same funds to set up a new company and acquire the assets of the old.
The liabilities of the old business such as outstanding debts and unfavourable lease agreements remain in the old company which is then normally liquidated. Because a new company seemingly appears from the remnants, or ashes of the old, this practise is also known as phoenixing.
Pre pack administration has received its name because the administrator packages up the business assets and completes their sale before a creditors meeting is held. It is not necessary to involve the failing business’s creditors with this negotiation or gain their approval.
The process can be seen as controversial because the creditors do not have the opportunity to vote against the proposed asset sale. The rationale behind the process is that the swift sale of the business assets may be necessary or of benefit to enable a best price to be achieved. If the sale was delayed, creditors would ultimately lose out because the price charged for the assets would be reduced.
Pre Pack Administration is often incorrectly termed pre-pack liquidation. In the strictest sense, there can be no such thing as pre-pack liquidation.
How does Pre-Pack Administration Work?
There are a number of elements to the pre-pack administration process which often happen in tandem. The main activities are given below:
New limited company is registered
A new limited company is registered. The directors of the new business are often the same directors of the old business. However, they do not have to be. This new company is known as a Phoenix.
It is important to note that if HM Revenue and Customs believe that the directors of a new company have a history of non payment of VAT and other taxes, then they may not allow the business to be registered for VAT without first paying a cash deposit. This deposit could be a sum equal to the average of the last 4-6 months VAT due from the old business.
Appoint an Administrator
The directors of the old company appoint an administrator (this person will generally be a licensed insolvency practitioner). The administrator will instruct an independent valuer to provide a valuation of the company’s assets.
Assets sold to new company
The administrator will draw up a sale and purchase agreement and then negotiate the sale of the old company’s assets with the directors of the new business. The assets are then legally transferred to the new phoenix company.
Hold Creditors Meeting
The administrator holds a meeting of creditors where the sale of the business assets is confirmed to the creditors. The administrator will be required to give a detailed explanation and justification of why the pre-packaged sale was undertaken.
Liquidate the Old Company
At the creditors meeting, the administrator will generally recommend that the old company should be liquidated straight away and the proceeds from the sale of the assets distributed between them. If the creditors agree to this, then the old company is liquidated.
The Advantages of Pre-Pack Administration / Phoenixing
There are a number of reasons why Phoenixing can be a very sensible way to deal with an ailing company:
Minimum Disruption to the Core Business
Very often, the result of a company being put into administration will be that business assets are split up and sold to any number of buyers. The core business is lost and the remaining shell of a company is wound up. A phoenix company will preserve the core business and its assets together and possibly continue to trade without staff and customers seeing significant disruption.
Preservation of the company Brand
Part of the sale of the old company’s assets within a Pre-Pack administration would be the brand and good will of the old business. If a company simply goes into administration this brand and good will may be lost. With Pre-Pack administration, the new Phoenix company can continue to take advantage of the brand value.
Preserve the jobs of employees
Significant business advantage can be gained where current employees and teams can be kept together. A new Phoenix business will give the maximum opportunity for employees to remain employed and minimise redundancy particularly as TUPE law (Transfer of Undertaking and Protection of Employment) must be observed.
Maintain trade with existing suppliers and customers
When a new sustainable business can be introduced where the previous company was failing, this will give the maximum opportunity for customers and suppliers to continue to trade with the new company. Clearly, there may be outstanding debts from the old company. However, these would exist regardless and therefore better have the opportunity to preserve future business with a new Phoenix company than none where a business is simply liquidated.
The problems with Pre-Pack Administration / Phoenixing
There is a significant issue with the Phoenixing process which is often raised and which should be considered. This is that the creditors of the old company are left with unpaid debts which in turn may cause other businesses to fail.
However, the Phoenix process is not the reason why creditors lose money. Creditors lose money because a company is already failing or has failed. In this situation, it is likely that the old business will be put into administration and or wound up. As such, the fact that the creditors will lose out is inevitable.
The fact that creditors are owed money which they are unlikely to get back is not a product of the Phoenix process. This would have happened anyway. As such, the option of a phoenix or pre-pack administration should be compared to company liquidation or other likely outcomes, not the impossible dream of creditors being paid in full.
Phoenixing Frequently Asked Questions
Will a phoenix company take the old business liabilities on board?
Except for the employees Transfer of Undertakings & Protection of Employment (TUPE) claims, which will be transferred to the phoenix company, all liabilities remain with the old company, which goes into Administration and then is likely to be liquidated.
If phoenix company wishes to take over assets subject to hire purchase or lease agreements it will be up to directors to negotiate new terms with the HP or leasing companies.
Will the phoenix company have a right to trade from the old company’s premises?
If the phoenix company does not acquire the premises it may occupy them under license from the Administrator until the premises are sold. The phoenix company can be granted a license to occupy the property until the sale is completed, should it wish to purchase the property.
The landlord would not normally allow the phoenix company to automatically take an assignment of the lease. However, the phoenix company could be granted a license by the Administrator to occupy the premises until a new agreement is signed with the landlord if this is required by the new business.
Should the creditors be told?
Creditors will not normally be involved in the negotiations regarding the sale of the old company assets before the old business is put into administration. There are of course strict procedures to be followed regarding the asset valuation. Once the old business is put into administration, all creditors will be told under the normal administration rules and procedures. Once appointed, the administrator will ensure that the best price is obtained for the assets, and be required to give a detailed explanation and justification of why the pre-packaged sale was undertaken.
Should the customers be told?
No. However if they are debtors and not purchased by phoenix company as an asset the Administrator, Administrative Receiver or Liquidator will write to them requesting payment of the outstanding amount.
What happens to the employees?
All employees and their accumulated rights such as holidays etc. must transfer to the new company under TUPE (Transfer of Undertakings) law. It is not possible to choose which employee would go.
We would strongly recommend that legal advice is taken regarding the employees?rights and the potential liability to the phoenix company.
How long will the process take?
Given that the negotiation for the purchase of the old company’s assets has already taken place, the whole process can happen within a few days. It is generally driven by the financial pressures that the failing company is experiencing and the need for the Administrator to protect the assets for the creditors.
Will a Director’s Disqualification Report (D Report) be issued?
A Disqualification Report will be submitted to BERR (Department for Business, Enterprise and Regulatory Reform – formally known as the DTI) by the Administrator or Liquidator of the old company (Office Holder) regarding the conduct of the directors during their stewardship of that business.
It is important to note that such a report will be completed for the Directors of the old business that has been put into Administration. The report does not focus on the new phoenix company or any directors of the new business who were not directors of the old company.
Pre pack Administration or Phoenixing
For many businesses one of the advantages of a pre pack administration will be that they are able to continue to trade from the same premises. We investigate how this is achieved.
In a pre pack administration debts are not transferred to the new company. If any of the outstanding debts have been guaranteed by the company directors, they will be personally liable. We discuss the options available.
If your company is failing because of the weight of historic business debt repayments, pre pack liquidation can write off debt and give the business a new start.
Pre-pack administration or phoenixing can be a useful rescue solution for businesses in financial trouble. However you may find taking advantage of this option might get hindered if HMRC decide they want a VAT deposit. When is this likely to occur?
Pre Pack liquidation or Phoenixing has become the subject of much debate over the past 12 months. It is my view that these arguments against the pre pack process are fundamentally flawed.
You may be considering simply cutting your losses and closing your business. However the business idea and certain elements of the current business may still be viable. A pre pack liquidation (commonly known as the Phoenix process) allows a new company to be formed using the viable parts. Follow this process below.
Undertaking a business pre pack liquidation is by no means a recipe to ensure that the new phoenix business will be a success. However, considering the areas in this article will certainly help to avoid some of the pitfalls of the pre pack process.
Business Phoenixing – Is a Pre Pack a practical way to avoid company failure?
As the recession continues to bite, more and more businesses are finding it difficult to continue trading. However, very often these difficulties are not because customers have stopped buying completely. Rather, they are buying in reduced volumes and asking for lower prices. Facing these circumstances, many businesses could continue to trade if they did not have the burden of servicing legacy debts….