Pre pack Administration (Phoenixing)

In a pre pack administration you create a new company which buys the assets of the old business and then trades in its place without the burden of debt.

• Legacy debts are written off
• Unfavourable lease agreements are left behind
• Brand name, goodwill and employees are retained

If your company is suffering serious financial difficulties or you have been threatened with a winding up order -
find out how pre pack administration can save your company

Where to start

• Check if you qualify – use the Solution Calculator to get a FREE REPORT
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What happens to Directors

Move to the new business

The directors of the old company will normally want to work in the new business. However they are under no obligation to do so.

New directors can be introduced to the board if required.

Directors disqualification report

It is highly likely that the old company will be closed. The liquidator will then have an obligation to undertake a disqualification report on each of the directors.

This is a standard procedure after a company is liquidated and ensures that the directors are not responsible for wrongful trading (trading the company while knowingly insolvent).

In a pre pack administration case, it is unlikely that the liquidator will accuse any director of wrongful trading. However, to avoid this procedure altogether, the directors would have to consider whether an alternative rescue option such as CVA would be more suitable.

What happens to Employees

Move to the new business

One of the advantages of pre-pack administration is that generally the operation and employees remain intact. All of the employees of the old company are simply employed by the new business.

TUPE

Under European transfer of undertakings law (TUPE), employees must me employed by the new company under their current employment terms length of service benefits.

If any restructuring of the business means that employees are no longer required, they must be transferred to the new company and then made redundant taking full account of their employment rights.

What happens to Creditors

Assets sold on behalf of creditors

Once the assets have been sold, the administrator will generally close the failing business through voluntary liquidation.

After any preferred creditors have been paid, any remaining funds will be shared between the unsecured creditors

One of the advantages of pre pack administration is that it minimises creditor losses. The company assets are sold as a going concern. As such, their value is greater than if they were sold off piece meal as in a normal liquidation process.

Pre pack not the reason for company failure

One of the arguments against pre pack administration is that it allows a company to continue to trade while leaving unpaid creditors to carry the can.

This argument is incorrect. A pre-pack is only undertaken if the old business is failing.

As such, the return for creditors must be compared to what they would receive if the business was liquidated in the normal way and not the impossible dream of full repayment.

What will pre pack administration cost?

Upfront investment

Pre pack administration requires upfront investment in the new company to enable it purchase the assets of the old.

The assets of the old business including good will and work in progress must be valued by an independent valuer.

Generally, the company's assets must be valued at a minimum of £15,000 to make a pre pack viable.

VAT Deposit

The new business will normally have little or no cash flow when it is set up. As such, further investment may be required to ensure sufficient working capital.

It is also possibly that HMRC will require a VAT deposit to be paid if old company had tax debts and the directors of both old and new companies are the same.

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