Derek Cooper

Phoenix or Pre-Pack guide for dummies

Phoenix or Pre-Pack guide for dummies

Have things got so bad you are thinking of cutting your losses and closing the business? Is the core idea still viable? Phoenixing (or pre-pack) lets you form a new company with the viable parts and go on to run a successful business.

Your company may be in a position where it is failing because it cannot pay its creditors. On top of that company agreements such as premises leases are no longer appropriate. If this is the case, you may be considering simply cutting your losses and closing the business. The problem with this strategy is that the business idea and therefore certain elements of the current business assets may still be viable. However, if you simply liquidate the company, the assets could well be lost.

A pre pack liquidation (commonly known as the Phoenixing process) allows a new company to be formed which then buys the assets of the old failing business. Employees may be transferred to the new business. The old business is then closed (or liquidated) and proceeds of the sale of assets distributed to the outstanding creditors.

In order to successfully carry out a pre pack liquidation, there are a number of steps that will need to be carried out. The following steps do not always follow in the order below. The correct timing to undertake each will be advised by the insolvency professional working with the company board.

• Working with an insolvency professional the board review the situation and agree a Pre-pack is the right route to take.
• A new company is formed complete with bank account and VAT registration ready to buy the assets of the old business. Generally this will be with the help of the business insolvency professional.
• An Insolvency Practitioner is introduced to the old company who will instruct a valuer to assess the value of the company's assets.
• It is often the case that the new business will want to remain in the same premises so agreement needs to be reached with the landlord to transfer the lease. As the landlord may want to renegotiate the lease in their favour it is worthwhile having an possible alternative location as a bargaining chip.
• The Insolvency Practitioner agrees to sell the assets, good will (and name if required) to the new business. There may be a deferred payment period if agreed. If finance cannot be made available through a more traditional route such as property equity release or a commercial bank loan, the area of Asset refinancing may be considered. Many asset finance companies will lend against the value of the assets such as plant and machinery to be purchased by the new company.
• Employees of the old company are transferred to the new business as required and taking into account TUPE (European law regarding the transfer of undertakings and permanent employment).
• The Insolvency Practitioner calls a creditors meeting to report on the old company's outcome to its creditors. The insolvency practitioner is appointed by creditors to liquidate the old business. The creditors will receive a share of any available proceeds from the sale of the old company's assets.
• The board of the new company get on with running the business. In order to improve cash flow, invoice factoring may be considered which may give immediate access to up to 80% of the value of all new invoices raised by the new business.

There are various costs involved in the process. These are an upfront fee paid to the business insolvency specialist for the advice and assistance provided. Of course, then the funds required to buy the assets of the old business must be raised. The insolvency practitioner will take their fee for liquidating the old business from the money raised by the sale of the business assets.

The advantages of the pre pack process can be significant. The assets of the business such as important employee teams, equipment and good will are maintained whereas they may break apart if a company is simply liquidated. In addition, the liquidator will generally get a better price for the assets (especially good will) and therefore better return for creditors if they are sold as a whole to start a new business. The new company has the opportunity to operate into the future thus providing a continuing trading partner for suppliers and customers both new and old.

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