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Pre Pack Liquidation, commonly known as Phoenixing is an option you should consider if your company is no longer financially viable. If you are looking at closing (or liquidating) the business, but believe the business idea remains good then look at this process. Pre Pack liquidation is a process where a new limited company is formed, often by the management team of the old business. An agreement is then made for the new company to buy the assets of the old firm. Assets do not just have to be physical equipment, but can include such items as the right to use the old company trading name, client lists and goodwill. The existing troubled business is then closed (or liquidated). Any creditors who have outstanding balances with the old company are paid as far as possible from the proceeds of the liquidated assets. However, they have no claim over the new company for any outstanding debt. Where the business idea remains viable, the new company has the advantage of setting up with the benefit of lessons learnt from the old one. The positive elements from the old business can be retained and developed and the less productive elements discarded. The fact that the legacy debt of the old business is left behind is also of significant benefit allowing the new entity the best chance of success. Of course, there are a number of areas that need consideration before undertaking a pre pack liquidation. The main one of these is that funds will need to be raised to pay for the purchase of the old company's assets. A formal valuation will have to be undertaken ensuring that the price paid reflects the true market value. Very often the funds required may have to be borrowed or raised perhaps through an asset refinance scheme. Earlier this year there have been a number of negative views expressed about Phoenixing. The main reason for this is that there is an understandable perception that the creditors of the old business are left high and dry because of the Pre Pack process. However when looked at in a bit more detail it can be seen that this is not a fair picture. The only time that a pre pack would be used is where a company is struggling and at risk of bankruptcy. If nothing is done, the likelihood is that the business will be closed anyway. If the business is liquidated under these circumstances, any assets would be sold as distressed and normally below market price thus leaving creditors with very little if any return. As such, a pre pack often gives the best opportunity to realise the value of the business' assets and return something to creditors. In its strictest sense, opting for a pre pack liquidation does not avoid the bankruptcy and subsequent closure or liquidation of the original company. However, it does allow a new business to be generated which is in a far better position to continue to trade successfully preserving jobs and a customer for its suppliers into the future.
Derek Cooper is Managing Director of Cooper Matthews Limited, and a member of the Turnaround Management Association UK.
More details about Phoenixing at coopermatthews.com/phoenixing.html
Cooper Matthews specialise in Business Recovery Services Advice offering straight forward insolvency advice for businesses with financial problems to turn your business around. They have significant experience in working with small to medium sized businesses. Derek's experience of both corporate insolvency and business management puts him in a position to be able to understand the challenges facing businesses in today's economic climate.
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