I have got company debt problems – how can a pre pack help?

I have got company debt problems – how can a pre pack help?

If your company is failing because of the weight of historic business debt repayments, pre pack administration can write off debt and give the business a new start.

Company debt problems are one of the main reasons behind business failure. Significant business debts may have been built up while starting the business or through a period of expansion. Where expected growth has not materialised, revenues are not enough to sustain both the business and its historic debt.

Where a business is fundamentally sound, one way of removing the debts which are holding it back is pre pack administration.

This is the process of setting up a new limited company which buys the assets of the old business. The new business then starts to trade in place of the old but without the burden of its historic debts.

This ability to trade without debt, allows the new company to become sustainable and profitable.

In a pre pack debt is written off

After the sale of its assets the old company is closed using the liquidation process. The proceeds of the sale of the assets are shared out between the creditors.

Unfortunately it is usual for creditors only to receive a small proportion of what they are owed.

The fact that creditors are not paid has long been the basis for criticism of the pre pack process. However, it is important to remember that pre pack administration is a business rescue solution. It is only used when the business will fail if no action is taken. In such circumstances, creditors are likely to get no return.

The pre pack sale means that the best price can be attained for assets as a whole rather than trying to sell them piece meal in a fire sale once the business has already stopped trading.

As such, pre pack administration offers creditors the best chance of a return.

Investment needed to implement a pre pack

To implement the pre pack process, an independent valuation of the business is undertaken and a sale and purchase agreement is drawn up to facilitate the sale of the company assets. The new business is then required to pay the liquidator of the old company.

These funds can be made available in a number of ways. Clearly if an investor has a cash lump sum available, this is preferable.

In the absence of a lump sum, payments could be staged to allow time for the funds to be sourced. Alternatively funds can be borrowed on the strength of the trading projections of the new company.

The failure of a company is in nobody’s interest. This will lead to employees being made redundant and creditors receiving little or no return.

Pre pack administration gives a fundamentally sound company a new lease of life. It takes away the burden of historical debts which would otherwise cause failure, sustains employment and gives the opportunity to trade with a new business in the future.

The pre pack process is therefore a solution which should be carefully considered when deciding how to solve a company debt problem.