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Pre Pack Administration Process and Procedures

What is an administration sale?

When a business goes into administration one often hears about the administrators putting a business on the market as they try and sell the business. This is mainly because the administrators are charged with getting the maximum return for creditors as quickly as possible.

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What is an administration sale?

KSA Group Saves 25 jobs after pre-packaged administration sale

Eric Walls and Wayne Harrison are delighted to announce the sale of a 40 year old flexographic packaging and printing company in the Norfolk area. The business had been trading well, with sales of over £3m per annum, until the sudden loss of a major contract. The directors sought advice from our insolvency practitioners, and it was agreed that, regrettably, the company was no longer viable.Having considered all options available to the company with its directors, it was decided that a sale of the business and assets to a non-connected trade buyer was the most appropriate solution.Our team was advised by Roger Cutting of Charterfields who conducted the marketing of the business and assisted with the sale process. After a short period of marketing the business and assets including goodwill, intellectual property, stock and equipment were sold to a trade buyer in the same industry, which was not connected to the company or its directors.Eric Walls said “overall we are pleased with the sale, as we believe it achieved a better result for creditors due to the highly skilled jobs which were saved, and the novation of certain finance agreements where there was either no equity or modest equity available in the major pieces of plant & machinery concerned. We always look to the best option available, and in this particular case speed was of the essence, resulting in the use of the pre-packaged administration process”.Contact Eric Walls on insolvency@ksagroup.co.uk or call 0191 4823343

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KSA Group Saves 25 jobs after pre-packaged administration sale
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Advantages and Disadvantages of Pre Pack Administration

When is a Pre Pack Administration the best option? A pre pack is usually the best option if there is a good underlying business and there is an imminent threat of a creditor taking drastic action like a winding up petition or indeed a cut off of supplies/services which would damage the value and trust in the business.  The essential element is finance - someone, usually a third party or connected party such as the current directors, has to be willing and capable of getting finance to buy the business. This insolvency procedure is more common for larger businesses as it is quite expensive and complex.Pre pack administration is a viable business solution, but as with any venture it comes with its advantages and disadvantages... Advantages of pre pack administrationThe business continues to operate with no interruptions or destroyed value. Once the plan is ready and a contract of purchase is drawn up, the company is quickly protected by the court. This allows the administrator to sell the "business and assets". Debts can be written off. The process is quick.  If everything is in place then a company can be "pre packed" in a day. Higher returns for creditors. If the company's assets are sold with no interruption of business then a higher price is achieved.  This means there is more money for creditors than if the business went into liquidation.  The costs are lower. The process is cheaper than trading administration as administrators do not need to find funding to trade the business and there are less professional fees to pay. Directors can keep some control over the business. If the company is sold to people already familiar with how the business is to run, increases its chances of success. Lessons can be learnt to understand where the business failedDisadvantages of pre pack administrationThe process can generate negative publicity. The directors can be seen to shed liabilities and then carry on as if nothing has happened. Unsecured creditors think they have no say in the process and feel they’ve lost disproportionately Company may be sold to a competitor.  A competitor is often the most likely buyer as they know the business and will see it as an opportunity to expand. Loss or control by the directors as new funders/private equity may insist their removal Tupe rules apply. Job contracts have to be carried over into the 'newco' under TUPE rules so you cannot shed staff to reduce costs in the "newco" The "newco" will need to be funded. If the business is to be sold to a connected party (e.g. the former directors), they will need to fund the acquisition of the assets. These will need to be independently valued to avoid any issues. It is best to consult a specialist funder to help with this part of the process HMRC are likely to demand a VAT security deposit. If there is a substantial HMRC debt then HMRC may demand a deposit from the "newco" before they are allowed to register for VAT, as once bitten twice shy!  Remember that the business was already insolvent prior to any appointment/reaching an agreement. Any transaction to the existing directors or a connected third party need to be "evaluated" which adds time and cost.

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Advantages and Disadvantages of Pre Pack Administration

Pre pack pool: How does it work and how much does it cost?

From 2nd November 2015, there have been changes to the way pre-pack administrations cases are handled.    When there is a planned sale of a business to a connected party, the case can be referred to the pre pack pool for a review via an online portal. While it is optional to apply, Insolvency practitioners must advise those involved of the pre pack pool, as stated in the revised Statement of Insolvency Practice 16 (SIP 16).Visit the pre pack pool website here: https://www.prepackpool.co.uk The aim of the pool is provide better transparency for creditors who will receive an independent opinion of the sale. This will state whether the case is ‘unreasonable’ or not.  Creditors and suppliers will hopefully feel more confident with the new ownership and the business going forward.The Department of Business, Innovation and Skills has now revealed who the members of the pool are. The membership is as follows:David Abbott, MSc, FCA, AMCT David Blair, MA, FCA, MBA, CF Paddy Campbell, FCA Dr. Simon Chapman, C Dir Colin Coghlan, C Dir,FloD, MBA Philip Gardner, BA (Hons), FCA, Cdir, DipM Rodney Hare, FCA Len Jones, BA (Hons), FCA, MBA, MSc Philip Long, FCA Kevin C Mouatt, C Dir Jon Newell, FCA David Newman, C Dir, MBA Philip Oatley, FCA, BA (Hons) Tim Rose, C Dir, MBA Alec Sanderson, BA, C Dir, FBCS, CEng Tony Sanderson, FCA, BA (Econ) Philip Walter, BSc (Hons), CDir, FCMI Tony Wilkinson, FCMA Simon L Willis, C Dir, BScThe service will cost £950 + VAT. For more information and to apply, visit: https://www.prepackpool.co.uk

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Pre pack pool: How does it work and how much does it cost?

Pre-pack Administration and Phoenix Companies: What’s the difference?

Pre-pack administration and liquidation restarts (phoenix companies) are both viable insolvency proceedings which have attracted controversy in the past. They have similar functions in that they allow a business to continue in a new guise. Here, we’ll explore both pre-pack administration and liquidation restarts and determine the key differences between the two. What is pre-pack administration? Pre-pack administration is when a company organises the sale of its assets before it appoints administrators.The company does this by using an Insolvency Practitioner (IP) to negotiate on its behalf. The IP will sell the business on to a trade buyer, a third party or ‘newco’ (a new company formed by the existing company’s directors).This quick and easy process stops all legal action and debt recovery and it allows the business to continue in a new company with the minimal of disruption.  Employees can continue to work with the new company.  The money paid by the new company for the old company is used to pay off the debts.  The process is all done in one move. What is a liquidation restart? A liquidation restart, sometimes known as a ‘phoenixing', is where the directors start a new company after the old company has gone into liquidation and then buys it assets such as stock, website etc.The business assets must be sold at a fair price. Otherwise, directors could face repercussions from the Insolvency Service, including director disqualification. What’s the difference between pre-pack administration and liquidation restarts? Firstly, let’s look at their similarities:The money from the sale repays creditors and the company can continue. The directors’ conduct will be investigated and liabilities, such as job contracts, will be carried over to the purchaser. Forming a 'newco' could incur significant expense for the directors.And what’s different:Pre-pack administration helps rescue the business and avoid insolvency, while a liquidation restart realises a company’s assets before it closes down. Pre-pack administration is one fluid motion: the sale of the company. A liquidation restart, by contrast, has two stages. The first stage is where the ‘newco’ sets up, begins trading and gathers enough working capital to buy the ‘oldco’ assets. The second stage liquidates the ‘oldco’, realises its assets (which the 'newco' buys) and winds it up. A pre-pack administration is governed by the rules of administration and the Statement of Insolvency Practice 16 (SIP 16), unlike a liquidation restart which has its own, less formal rules.

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Pre-pack Administration and Phoenix Companies: What’s the difference?

Will HMRC Scupper YOUR Pre-Pack? VAT Security Deposits.

VAT Security Deposits - A Guide When a company has been liquidated or the business has been sold out of administration or pre-pack administration, the directors of the new company set up to acquire and run that business should BEWARE of the ability of HMRC to demand a security deposit.HM Revenue & Customs has the power to require a security for the payment of VAT and this can be used particularly when a business has gone through insolvency and been sold to a new company. This can have a major financial impact on the new company.Security may be required in the form of cash, or through an approved financial institution such as a bank providing a guarantee.The Law:Under paragraph 4(2)(a) of Schedule 11 to the VAT Act 1994, HMRC may require any taxable entity, to give security or further security for the payment of VAT that is or may become due in future.Circumstances, where HMRC will require a deposit, are where it sees a risk of non-payment of the future VAT, where a person is or has been actively involved in an existing or previous business that has failed to comply with VAT obligations. How much might the deposit be?  HMRC would take the previous business' VAT debts into consideration and provided the new business is similar in size to the old one, HMRC would generally calculate 6 months of future VAT as being required (if the previous and new business pay quarterly) or 4 months if the previous or new business pays VAT monthly. Will HMRC definitely ask for a security deposit from our new company? No, but if the previous company or directors of both the old and new company have a chequered past with regards to non-compliance with HMRC rules and have regularly not paid taxes on time, or have been involved in multiple business failures, then YES, the likelihood is HMRC will seek a security deposit.What if we don't pay the deposit (i.e. we cannot afford it)?You must pay it or cease trading. Or if you seek to ignore the demand, it is a criminal offence to continue to trade without providing the required security and HMRC may prosecute if the deposit is not paid upon demand. Under section 37 of the Criminal Justice Act 1991 a magistrate may impose a fine of up to £5,000 for each taxable supply (ie each invoice) made without providing security. There is a right of appeal to an independent review or tribunal. Summary:If considering a pre-pack administration or purchasing a business out of administration the new company directors should carefully consider what impact this would have on its future working capital requirements. In some cases, this could throw a major spanner in the works where compliance has been poor in the past.We suggest that directors, particularly with a chequered history with HMRC, take advice from any proposed liquidator or administrator before completing the transaction to buy the business back.Is your company viable but struggling? Talk to us about avoiding this VAT security deposit! 0800 9700 539 or 01289 309431

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Will HMRC Scupper YOUR Pre-Pack? VAT Security Deposits.