When the assets of a struggling company (Oldco) are transferred to a new company (Newco), before being sold by the administrator to new owners, it is known as a "pre-pack" arrangement.
Pre-packs have been used for many years, and have a number of advantages. In particular, they are used to:
Permit the preservation of the residual value in a company, particularly one which is dependent on its intellectual property or brand
Permit a seamless continuance of trading
Generally, the transfer of the business and assets to Newco has always been regarded as the transfer of a business as a going concern (TOGC) for VAT purposes. This has the advantage of ensuring that Newco does not have to pay VAT on the sale of any assets, so there is a cash flow advantage, as well as in some circumstances constituting an absolute saving. It is important here to perhaps have regard to exactly what the transfer of a business as a going concern ( TOGC) constitutes.
The Inland Revenue sets out the conditions that have to be met for a transfer to be deemed to have taken place.
the assets must be sold as part of the transfer of a 'business' as a 'going concern';
the assets are to be used by the purchaser with the intention of carrying on the same kind of 'business' as the seller (but not necessarily identical);
where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer;
in respect of land which would be standard rated if it were supplied, the purchaser must notify HMRC that he has opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date;
where only part of the 'business' is sold it must be capable of operating separately; and
there must not be a series of immediately consecutive transfers of 'business'.
A recent employment tribunal case considered the impact of the Transfer of Undertaking (Protection of Employment) Regulations 1981 (known as TUPE) in the context of a pre-pack.
Oakland v Wellswood (Yorkshire) Limited
Following a pre-pack, one of the employees transferred to Newco (Mr Oakland) claimed he had 12 months' continuous service (which included his period of employment with Oldco) so as to sustain his complaint for unfair dismissal.
This in turn depended on whether the transfer from Oldco to Newco fell within TUPE. Under the TUPE regulations, continuous employment provisions do not apply where the Oldco is the subject of bankruptcy proceedings or any analogous insolvency proceedings instituted with a view to the liquidation of the assets of the transferor, and are under the supervision of an insolvency practitioner.
The Court held that the principal purpose of the administration was the liquidation of the Oldco's assets, so the transfer was exempt from TUPE regulations.
The test of whether a transfer constitutes a TOGC is whether the transfer puts the buyer in a position whereby he can carry on the business as before.
Normally, this means the buyer taking over the business and assets together with the employees necessary for running the business. If the buyer does not take the employees over from the transferor, but rather employs them separately, this may well have the effect that the transfer is not a TOGC, but rather the sale of a number of assets with the result that VAT has to be charged. This may well jeopardise the feasibility of carrying out a pre-pack.
It seems that the judge in this case placed particular emphasis on the intention of the administrator, which was to liquidate Oldco's assets.
If, on the other hand, his intention had been to preserve Oldco as a going concern, then it seems likely that the judge would have considered the TUPE provisions applicable.
Whilst it is not necessarily a pre-requisite for employees to transfer from Oldco, clearly in the context of claiming TOGC relief, it would be helpful if the administrator's primary objective was the preservation of the business as a going concern.
For parties considering a pre-pack, it will be important for them to agree with the liquidator beforehand exactly what his intentions are, and that these are properly evidenced so as to protect TOGC status so far as possible.
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