Prepack is an insolvency process which allows an insolvent but viable business to be sold prior to administration to a third party or to a phoenix company. A phoenix company is a company set up by the directors of the failing company, and allows the company to continue trading under a new name without the burden of the insolvent companies debts.
The decision to enter prepack is usually made by the company’s directors if they find that their current debts are preventing them from continuing to trade. As with many insolvency processes, businesses will often have tried other options before deciding on this method and prepack is not a decision usually entered into lightly.
Prepack is most often considered if a business is still viable and many people are employed but its current debts make it insolvent. The process allows the existing business to form a new company or a third party to purchase the pre-packaged business.
If the Prepack is being purchased by the current directors as a Phoenix company they will need to arrange for the business to be independently valued and they will need the funds in places to purchase the assets for their true value.
Some people think that if the directors can access the funds to purchase the assets, then they could put this into resolving the old businesses insolvency problems, however businesses often consider that these funds are used more constructively if used to build up a new business rather than repaying old debts.
When not to use Prepack
There are some situations when prepack is not recommended:
If a creditor holds a debenture
If a creditor holds a debenture over its debt then they can overrule the administrator that has been appointed by the directors and they can appoint their own administrator. The creditors administrator not agreed that prepack is the best option. If this is the case then prepack may not be the best insolvency process for your business.
If you plan to use Prepack to restructure your business completely and get rid of all your staff
As part of the prepack, employees are protected under the TUPE regulations (transfer of undertakings and permanent employment) so the employees and all their employment rights must be transferred to the new business, unless a formal redundancy procedure has been followed. If you want to completely restructure your business without any of your current employees then prepack is not for you.
If you are worried you may be found guilty of wrongful trading
Once the new business has purchased the assets from the old company, an administrator will wind down the old company, as part of this process they must submit a directors disqualification report which details the directors conduct during the running of the business. If you are worried that this report may find you guilty of wrongful trading then prepack may not be for you.