Pre- packs are just another way to save an insolvent business.
- An insolvent company;
- A valuation of that company’s assets;
- An agreement being prepared and executed by the insolvent company and a new company, usually subject to a subsequent approval.
- The valued amount to be paid to the insolvent company by the new company.
- The insolvent company being placed into liquidation;
- The new company retaining the employees of the old company;
- The new company conducting the business previously carried on by the old company.
- An independent liquidator being appointed to review the bona fides of the sale.
These can only be successful if done early enough whilst there’s something of the old company to save.
If done properly, this is not a phoenix as a phoenix by definition involves fraudulent activity and this is a legitimate sale for value whereby creditors are not disadvantaged.
A pre-pack avoids the enormous costs involved in liquidations and voluntary administrations, which by eliminating those costs, in fact increases the amount available to creditors.
When the sale agreement has been signed, a liquidator should immediately be appointed to review and sanction the arrangement and the liquidator would hold the sale proceeds on behalf of creditors whilst reviewing the legitimacy of the sale.
This type of sale is not prohibited by the Corporations Act or any other legislation.
Insolvent trading and other laws provide an incentive to directors to appoint an administrator or liquidator and it discourages directors from pursuing informal restructuring arrangements and taking unreasonable risks in order to trade out of their financial difficulty.
There is no outright prohibition on pre-packs.
To a small business, pre-packs offer an opportunity to save a business but should only be attempted with professional assistance to ensure that creditors’ interests are protected.