Use a Pre-Pack or Phoenix to avoid Company Bankruptcy (Liquidation)

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by: derekc
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Date: Fri, 24 Sep 2010 Time: 3:42 PM

If your company is no longer financially viable in its current form, you may be looking at closing (or liquidating) the business. However, if you believe that the business idea remains a good one and if set up perhaps in a slightly different format the company could succeed, an option that you should look at is Pre Pack Liquidation, commonly known as Phoenixing.

In the Pre-pack liquidation process a new limited company is formed, often by the management team of the old business. An agreement is then made for the new company to buy the assets of the old firm. Assets do not just have to be physical equipment, but can include such items as the right to use the old company trading name, client lists and goodwill. The existing troubled business is then closed (or liquidated). Any creditors who have outstanding balances with the old company are paid as far as possible from the proceeds of the liquidated assets. However, they have no claim over the new company for any outstanding debt.

Where the business idea remains viable, the new company has the advantage of setting up with the benefit of lessons learnt from the old one. The positive elements from the old business can be retained and developed and the less productive elements discarded. The fact that the legacy debt of the old business is left behind is also of significant benefit allowing the new entity the best chance of success.

Of course, there are a number of areas that need consideration before undertaking a pre pack liquidation. The main one of these is that funds will need to be raised to pay for the purchase of the old company's assets. In order to ensure that the legal requirement for true market value is paid for the assets a formal valuation will be required. Very often the funds required may have to be borrowed or raised perhaps through an asset refinance scheme.

Over the past few months, there have been various negative views of pre pack liquidation. The main reason for this is that there is an understandable perception that the creditors of the old business are left high and dry because of the Pre Pack process. However when looked at in a bit more detail it can be seen that this is not a fair picture. The only time that a pre pack would be used is where a company is struggling and at risk of bankruptcy. If nothing is done, the likelihood is that the business will be closed anyway. If the business is liquidated under these circumstances, any assets would be sold as distressed and normally below market price thus leaving creditors with very little if any return. Therefore it is the potential bankruptcy that causes the losses to the creditors and a pre pack often gives the best opportunity to realise the value of the business' assets and return something to creditors.

In its strictest sense, opting for a pre pack liquidation does not avoid the bankruptcy and subsequent closure or liquidation of the original company. However, it does allow a new business to be generated which is in a far better position to continue to trade successfully preserving jobs and a customer for its suppliers into the future.

About the Author

Derek Cooper is Managing Director of Cooper Matthews Limited, and a member of the Turnaround Management Association UK.

More details about Phoenixing at http://coopermatthews.com/phoenixing.html

Cooper Matthews specialise in Business Recovery Services Advice offering straight forward insolvency advice for businesses with financial problems to turn your business around. They have significant experience in working with small to medium sized businesses. Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic climate.

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