If your company is in financial difficulty it may be possible
to avoid liquidation and rescue the business by setting up a new
phoenix company which trades in place of the old without the
burden of debt.
Pre-pack administration (often known as Phoenixing) allows a
new limited company to be set up which purchases the assets of
the old business. The new company is then free to trade in place
of the old without having to repay the old company's debt.
At first glance, leaving the old company's debts unpaid may
seem unscrupulous. However, where a business is failing,
creditors are unlikely to ever recover much of the debt owed. A
phoenix operation gives an opportunity for ongoing trade with
suppliers and customers, and the retention of employees whom
would otherwise face redundancy.
In many circumstances, the phoenix process should be considered
as a very real option for business rescue.
Does the business have a real future?
The directors of the company must believe that without the debt
which is current dragging the business down, there is a very
real prospect that a new company can survive and grow.
Investment will be required as the new phoenix company must be
funded to allow it to purchase the assets of the old business.
Where funds are available which would otherwise be used to
repay debt rather than build the strength of the business for
the future, phoenixing may be appropriate.
Current premises are no longer appropriate
Because the phoenix process involves the incorporation of a new
company, there is no obligation on the new business to continue
with HP or lease agreements that were entered into by the old.
This means that leases or equipment which are no longer required
can be left behind.
If you wish to remain in the old premises then the strength of
your hand in renegotiations with the landlord will clearly
depend significantly on the ease with you could use an
alternative premises.
There are some circumstances when phoenixing may not be
appropriate:
Some employees are no longer required
It is important to note that pre pack administration will not
automatically allow you to remove staff where you believe there
is overcapacity or lack of needed skills.
European employment law (TUPE) states that if a business is
purchased by another, then the employees of the old company must
be transferred to the new with the same terms of employment and
length of service rights. As such, if any employees are unfairly
treated as a result of the phoenix process, they may have ground
to claim against the new business for unfair dismissal.
I have a winding up petition
Having a winding up petition is a show stopper for the pre pack
administration process. This is because once a winding up has
begun, none of the company's assets can be sold before a
liquidator is appointed at a creditor's meeting.
If you believe that your business is failing, pre-pack
administration is an excellent solution which you should
consider to help you turn the company around. However, you must
act as soon as possible and get appropriate specialist advice.
The more time that passes, the more likely that the company's
creditors will start to take action. If this happens,
particularly in the case of winding up proceedings, your options
will certainly be diminished, although there are still other
solutions that may be usable.
About the Author: Why not talk to us about how this solution
could help your financial troubles, more details at
http://coopermatthews.com/phoenixing.html Derek Cooper is
Managing Director of Cooper Matthews Limited, they have
significant experience in working with small to medium sized
businesses.
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