Avoid Company Bankruptcy (Liquidation) Using a Pre-Pack Or Phoenix

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.

Pre Pack liquidation is a process where 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. The assets may include physical equipment, client lists and goodwill and even the rights to use the old company name. The old 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.

Clearly, where the core business idea remains viable the advantage of setting up a new company is that this can be done using the lessons learnt from the old firm. 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. A formal valuation will have to be undertaken ensuring that the price paid reflects the true market value. 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. This is in fact not the case. 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. As such, 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.