Advantages and Disadvantages of Pre Pack Liquidation

There a number of advantages and disadvantages of Pre Pack Liquidation. Their relevance will very much depend on the individual circumstances of your company.

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Pre Pack Liquidation Advantages

1. Investment used for growth not debt repayment
The funds required to implement a Pre-Pack solution are used almost entirely for the setting up of the new company (which includes purchasing the assets of the old business) and investment for future growth. The new business has no debts and so none of the investment funds available need to be used for debt repayments.

2. Debt written off
Once its assets are sold, the old company will normally be liquidated. None of the old company’s debts are carried over to the new business. As such the new company can start to trade without the burden of any ongoing debt repayments.

3. Good will preserved
A Pre-Pack solution provides a seamless transition between one company and another. This ensures continuity for both suppliers and customers who very often can continue to do business with the new company will little or no interruption.

4. Teams remain together
Employees of the old company are automatically transferred to the new business under TUPE rules. Employees are allowed to resign their positions if they wish. However generally most employees will remain with the new company thus preserving know-how and functioning teams.

5. Better return for creditors
A Pre-Pack asset sale will almost always raise a better return for the old company’s creditors then if the company was simply liquidated and its assets sold piece meal. Creditors will often not recover their unpaid debts in full. However given the old business is insolvent this was never likely to be the case.

Pre Pack Liquidation Disadvantages

It is important to understand that as well as benefits, implementing Pre-Pack Liquidation can also have some disadvantages. Before making a decision to start the Pre Pack process you need to understand these in the context of your company.

1. Implementation costs may be significant
A sensible market price must be paid for the old company’s assets. This purchase will have to be funded by the directors or other investors and may be significant depending on the valuation. Having said this, it may be possible to arrange to pay for the asset purchase overtime from the trading profits of the new company.

In addition to the purchase of the old company’s assets, funds may also have to be found for an HMRC VAT deposit.

2. Directors conduct investigated
Given that the old company will be liquidated, the appointed liquidator will have an obligation to report to the Insolvency Service on the conduct of any directors of the company for the last three years. If any of the directors have acted inappropriately, particularly if they have allowed HMRC debts to grow while they knew the company was insolvent, they may risk disqualification.

3. Overdrawn directors current account and guarantees called in
If the directors owe money to their old company in the form of an overdrawn director’s current account they will be personally liable for the repayment of this once the old company is liquidated.

If any of the directors have given personal guarantees they will then become personally responsible for the repayment of these debts after the old company is liquidated.

4. Employees must transfer to new business
Generally speaking any employees from the old company must be transferred over to the new business with the same terms of employment and years of service as per the TUPE rules. As such a Pre-Pack solution cannot be used to avoid staff restructuring and redundancy costs.

More Pre Pack Information

Only a brief overview of the Pre Pack advantages and disadvantages are given here. For more information about the Pre Pack solution see one of our dedicated websites:

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