Pre-pack administration and liquidation restarts ( phoenix companies) are both viable insolvency proceedings which have attracted controversy in the past.
However, 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:
Pre-pack administration and liquidation restarts are similar proceedings. In both instances, the money from the sale repays creditors and the company can continue.
However, in either scenario, the directors’ conduct will be investigated and liabilities, such as job contracts, will be carried over to the purchaser.
In both cases, forming a 'newco' could incur significant expense for the directors.
And what’s different:
There are some fundamental differences between the two; 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.
Another significant difference between them is that pre-pack administration is governed by the rules of administration and the Statement of Insolvency Practice 16 (SIP 16).
Issued in November 2015, this statement gives IPs guidance for taking part in a pre-pack administration process. The aim behind this was to reduce the scepticism about pre-pack administration by providing greater clarity of the entire process.
The SIP 16 includes the following key points:
- The company taking part must make a statement on how it came to the decision to use pre pack administration, and provide this to creditors
- The IP advising the company may not necessarily be the administrator
- A marketing strategy must be outlined and conducted in full before the sale goes through
- There must be full disclosure from both the IP and the company taking part
While a liquidation restart has its own rules, including those about the name of the ‘newco’ and role of certain directors, there is a much more formal process to follow for pre-pack administration.