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I have company debts including HMRC - Will pre pack administration help?

If your company has debt which it is unable to pay, its creditors, particularly HMRC, could try to force the closure of the business with a winding up petition. Pre pack administration can prevent such action.

Traditionally, creditors try to collect money that they are owed from a company by issuing county court judgements and possibly even threatening bailiff action. If appropriate they will also stop supplying the business until accounts are brought up to date.

It is however becoming more and more common for creditors to try and force payment by threatening and then taking action to wind up the business.

HM Revenue and Customs (HMRC) will often initiate winding up action because the forced closure of the business is the only way that they can ensure that a company's tax arrears debt will not be allowed to get any worse.

If a winding up petition is issued against your company, this will have very serious implications. Its bank accounts will be frozen and trading must be suspended. As such, it is important for you to act to resolve a debt problem early.

"Timely action" the key

Pre pack administration will enable a business to write off its debts and begin trading afresh.

The process involves the setting up of a new company which buys the assets of the old and then begins to trade in its place. The old business is then closed and creditors paid from the proceeds of the assets sale.

Creditors will normally only receive a proportion of what they are owed. However, the return they are offered is better than if the company was wound up and the company’s assets sold off piece meal by the liquidator.

Pre pack administration cannot be used if a winding up petition has already been issued. As such, if winding up action has been threatened or you believe that your company is at risk of receiving a winding up petition, you must act quickly.

Investment is required for Pre Pack Administration

Pre pack administration involves the purchase of the old company’s assets. The amount that must be paid for these assets is based on an independent valuation. This sum could be provided by one of the company directors or another investor.

If the investment required is not readily available, the new business may be able borrow it against the security of the business assets it is purchasing or alternative assets such as a director’s property.

The requirement for upfront investment is often seen as a barrier to undertaking a pre pack solution.

However, when comparing the different options, it is important to remember that all the company’s debts are written off. In addition any unfavourable lease and rent agreements can be re-negotiated based on the fact that they are being taken on by a brand new company.

It is the responsibility of the directors of the business to make sure that a company is not allowed to trade while insolvent. If they do not do this, they could themselves be held liable for the company’s debts.

It is therefore extremely important to take action if you believe that your company is struggling with debts that it is unable to repay. This is one problem which will not disappear on its own. Taking the necessary advice early will give a much better chance of finding a solution which is the most appropriate for the business.

Talk to us about how a pre pack administration could rescue your company http://coopermatthews.com/phoenixing.html

Derek Cooper is Managing Director of Cooper Matthews Limited and a member of the Turnaround Management Association UK.

Cooper Matthews specialise in Business Recovery Services Advice providing straight forward insolvency advice for businesses in difficulty and business owners with personal financial problems. They have significant experience in working with small to medium sized businesses, working with Directors, Sole Traders and Self Employed.

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