Pre-pack administration will generally be considered by a company’s directors if they believe in the future viability of the business but feel that it is unable to continue to trade with the weight of current debts and liabilities.

Generally the directors or other investors will have access to funds but may not wish to inject these directly into the old business. The reason for this is that they believe that these funds would be better used for business building activities rather than for the repayment of historic debt.

Funds used to aquire assets of old business

Instead of putting additional resources into an already insolvent company the directors are able to use the same funds to set up a new company and acquire the assets of the old. The new company is solvent from day one and can operate free from debt.

The old company may also have hire purchase and lease agreements which are no longer appropriate for the business. A new phoenix company has the opportunity to re-negotiate these terms or move to more suitable premises if such an agreement cannot be reached.   

Appointing an Administrator

If a creditor of the old company (normally a bank) holds a floating charge or debenture over its debt, it also can overrule the directors appointment and appoint its own administrator.

Where this is the case the creditor appointed administrator may not agree with the pre-pack sale of business assets. As such, in these circumstances, a pre-pack may not be chosen by the directors as a rescue solution.

The Transfer of Employees

Although the majority of debts and liabilities remain with the old company, under TUPE regulations (transfer of undertakings and permanent employment), employees with their accumulated rights such as holidays, redundancy entitlement etc. must be transferred to the new Phoenix Company if their positions are maintained.

For this reason, pre-pack administration cannot be used as a vehicle to reorganize a company’s staff without following a proper and formal redundancy process. If employees are not taken on in the new company where their positions have been maintained, then they may well have grounds to take legal action against the new phoenix company for unfair dismissal.  

Directors Disqualification Report

Once the assets of the old company have been sold, the business will generally be liquidated by the administrator. As such, the administrator will be required to submit a directors’ disqualification report to BERR (Department for Business, Enterprise and Regulatory Reform) regarding the conduct of the directors during their stewardship of that business.

If the directors of the old business are worried that this report may highlight that they are guilty of wrongful trading, then this may be a reason to avoid the pre-pack liquidation all together and consider an alternative solution such as company voluntary arrangement (CVA).

It is important to note that a director disqualification report will be completed for the directors of the old business that has been put into Administration. The report does not focus on the new phoenix company or any directors of the new business who were not directors of the old company.