Pre-Pack Liquidation In Ireland: How It Works, Costs & Advantages
A pre-pack liquidation is a process that allows a struggling Irish company to sell its business and assets to a new company, preserving trading activity and jobs, before the old company is formally liquidated. Although widely used in the UK, pre-pack liquidations are less common in Ireland. Irish pre-packs tend to be large companies but as Peter Dawson explains there is no reason why smaller companies cannot avail of the advantages to save the business.
What is a pre-pack liquidation?
In a pre-pack liquidation a new company (‘NewCo’) is formed to take over the assets of a failing company (‘OldCo’) by paying a pre-agreed price for its assets. NewCo trades on and OldCo is liquidated in the normal way.
What is involved in the pre-pack liquidation process?
In advance of making the transfer, the assets to be taken over from OldCo are professionally valued by an independent valuer. These assets include the goodwill of a trading business. Once the valuations are prepared, a legal agreement is drawn up between the old company and the new company.
The trade moves over and the old company is put into a Creditors’ Voluntary Liquidation (CVL) process and it follows the normal CVL procedure. The valuation piece is critical – the physical assets and any goodwill value attached to the business. Goodwill valuation is more subjective than the physical asset value.
The employees to be transferred to the new company are identified. The agreed value is paid to OldCo, typically to OldCo’s solicitors for the benefit of the creditors. The liquidator will then apply this consideration towards costs and creditors in accordance with the Companies Act 2014.
What needs to be done before commencing a pre-pack liquidation?
A professional advisors report will be required. This report will include a an asset valuation report, consideration of various other matters such as employment law issues, personal guarantees, the position of lenders, landlords, terms of trade, insurance claims, any ongoing litigation and make a comparison to the position where the company ceases to trade. OldCo will need to be able to demonstrate that the assets are not being sold for below market value.
How does a pre-pack liquidation compare with SCARP or examinership?
Pre-pack liquidations require fewer professionals so there is less cost. The Small Company Administrative Rescue Process (SCARP) is much less costly than an examinership but professional costs will still likely run to in excess of €20,000.
In the SCARP arrangement, Revenue can reject the proposed rescue plan. Where the taxpayer has a reasonable track record with Revenue may vote in favour of the SCARP proposal, but if there is a poor history of paying tax debts they may say no.
Any creditor who is being crammed down in the SCARP solution can also object, which at a minimum will delay the process and increase the cost. With the pre-pack there is certainty, subject to the assets valuation being right.
What are the advantages of a pre-pack liquidation?
The sale can be completed without material interruption to trading activity, thereby preserving value and safeguarding jobs. Certainty is the standout advantage. Where a company is running two distinct trades - one failing, one profitable - a pre-pack allows a new entity to be created that keeps the profitable trade going, while the failing element is left behind in the old company, which then proceeds to CVL. This separates the viable business from the parts dragging it down, rather than trying to rescue the whole entity as one unit.
Done correctly, a pre-pack is underpinned by independent third-party valuations, a formal purchase agreement and a full schedule of assets. This matters because Revenue will scrutinise the new company closely and will challenge the arrangement if they believe assets were undervalued. A properly documented pre-pack, with valuations that can withstand scrutiny, gives the process credibility and reduces the risk of it being unpicked after the fact.
What are the disadvantages of a pre-pack liquidation?
It is not suitable for all cases. NewCo may experience difficulty obtaining credit, personal guarantees in OldCo are not set aside and the conduct of the directors in OldCo is examined by the liquidator under the oversight of the Corporate Enforcement Authority.
Can a pre-pack liquidation generate a better return for creditors?
Asset valuation in a pre-pack can work in creditors’ favour. Where equipment or assets are sold and kept in situ (i.e. not moved from where they’re currently located), the valuation is typically higher than an ex-situ value, because the buyer avoids the cost of relocating the equipment. That higher price translates into more funds being available to the liquidator and therefore to the creditors than might be realised through a forced sale or break-up of the business.
What is the key imperative before progressing a pre-pack liquidation?
Before you look at any of these options, you must go back to the basic test - is the business profitable? Fundamentally it has to be able to generate surplus cash post the pre-pack . If you’re not generating a surplus then your only option is a CVL.
Pre-pack liquidation advice from HLB Ireland
If you're considering a pre-pack liquidation for your company, we can carry out a preliminary assessment of suitability and answer company-specific questions to help you decide if it's the right option.
Get in Touch
If you would like to discuss your situation in confidence, our Restructuring and Insolvency specialist Peter Dawson at [email protected] is here to help. He will provide clear, practical guidance to support you at every stage. Check out our Restructuring & Insolvency page for more information.
