Advantages of Pre-Pack Administration

• The swift sale of the assets of a failing company will achieve a better price and therefore return for creditors than in a standard administration process or if the business had been simply liquidated.

• Investors are given the opportunity to put money into a new company which can be focused on business growth whereas they may be reluctant to invest in a failing business where funds will be directed to repaying historic debt.

• The brand and goodwill of the old company can be preserved as there can be a seamless transition between the new and old businesses. If a company simply goes into administration this brand and goodwill may be lost.

• Significant business advantage can be gained where current employees and teams are kept together. The option of a new Phoenix business will give the maximum opportunity for employees to remain employed and minimise redundancy.

• A new phoenix will give the maximum opportunity for customers and suppliers to continue to trade with the new company. Clearly, there may be outstanding debts from the old company. However, these would exist regardless and therefore better have the opportunity to preserve future business with a new Phoenix company than none where a business is simply liquidated.

Disadvantages of Pre-Pack Administration

• In order to achieve a pre-pack administration, the directors of the failing business must be able to find the necessary funds to buy the assets of the old company. If such funds cannot be raised, a pre pack will not be possible. In this case, the directors may have to consider alternative solutions such as a company voluntary arrangement (CVA).

• If the directors of the new Phoenix company are known by HM Revenue and Customs to have a history of non payment of VAT and other taxes, the VAT registration of new company my be blocked by HMRC without a security deposit.

• After the old company has been liquidated, the Liquidator will be required to complete a directors disqualification report regarding their conduct. If the directors wish to avoid this report being undertaken, they may need to consider an alternative solution such as CVA.

• The creditors of the insolvent company are left with unpaid debts which in turn may cause other businesses (creditors) to fail. However, it is important to recognize that the Phoenix process itself is not the reason why the old business fails Given that the business is insolvent, if it had been wound up or put into standard administration, it is likely that the creditor’s losses would have been far worse.

• Given the strict TUPE rules governing the employment rights of employees, pre-pack administration should not be viewed as a method of restructuring employees. Where roles are maintained by the new company, employees must be transferred from the old under the same terms and conditions.