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My biggest customer’s gone bust owing me a lot of money. Now my business can’t meet its own debts and the taxman’s threatening to wind the company up. The business is sound but can’t carry on with its existing liabilities. It needs a clean break and a fresh start. I’ve heard about “pre-packs”. What are they all about?

Businesses are about creating prosperity and jobs, but company insolvencies are a fact of life in a modern economy.

A pre-packaged sale (hence “pre-pack”) is a pre-arranged sale of an insolvent company’s assets at market value to a new company (“newco”), and may often involve the existing management. The newco re-employs the existing staff, probably produces the same products from the same premises, uses the same equipment, and with a similar name!

The process involved is not, perhaps surprisingly to some, illegal and pre-packs have been sanctioned by the government, the Courts and regulatory bodies. The majority of pre-packs are perfectly legitimate (although some look decidedly dodgy!) and actually provide a better outcome for creditors.

The justification for pre-packs is that, by the time a company goes into formal company insolvency, it’s probably exhausted its cash reserves and suppliers’ credit. Once an administration or liquidation starts, invariably customers stop paying, suppliers stop supplying and key, highly skilled employees may leave, perhaps going to competitors. What’s more, it may be difficult to raise the cash needed to carry on trading even for a short period.

All those are reasons to avoid a protracted, publicly advertised sale procedure. You might argue that a “secret sale” is better than no sale at all. And since the directors know the business and its assets better than anyone, they may well be prepared to pay more than an arm’s length purchaser.

However, a word of caution. Selling an insolvent company’s business and assets is a complex and highly specialist process with many potential pitfalls, and pre-packs are not appropriate in all cases. Doing the job properly calls for detailed business insolvency knowledge and experience, and should never be attempted without the input of a qualified insolvency practitioner.

The team of insolvency practitioners at tri group has vast experience of advising directors of distressed companies. Call us today for advice on company insolvency or for a free, no obligation discussion of the options available.