Many directors aren’t sure about the differences between liquidation and administration.
In this article we’ll define what those are, as well offer advice on which process may suit your particular solution
What is the Difference Between Liquidation and Administration?
Although the administration and liquidation processes are very different in their approach to insolvency, both aim to limit the damage caused by the company and its creditors.
|Administration||The primary aim of an administration is to help a company repay its debts and escape insolvency whenever possible|
|Liquidation||The process of liquidation describes the sale of company assets to repay creditors before dissolving the company completely|
What is Liquidation?
Insolvent Liquidation is the process of closing a company with debts. It involves the sale of all assets before dissolving the company completely, and requires an insolvency practitioner.
If a director becomes aware of the position of insolvency, they have no choice but to contact an insolvency practitioner immediately. Responsibilities at this stage are no longer to shareholders but to company creditors.
In short, liquidation is the right choice when the company is insolvent, with no realistic proposition of paying its debts.
What is Company Administration?
Administration is also a process of creating a legal ringfence around an insolvent company to prevent further creditor threats.
Having established that the company remains viable, i.e. it may yet return to profitability, the insolvency practitioner establishes a timeframe for the administration and implements business restructuring measures to improve the company’s position.
Company Liquidation and administration are two formal insolvency processes. The primary difference between the two processes is that if successful, company administration can lead to the complete recovery of the business. It can be restructured, repay its debts, escape insolvency and continue trading.
Can a Liquidation Follow an Administration?
Liquidation can follow on from a company administration, however, there are also some other potential resolutions that can result from an administration.
Pre Pack Administration
A pre-pack administration is a legal method of selling the business to a third party, or to the company’s existing directors operating under a new company name.
In some cases, if the directors have the necessary funds, the assets and ongoing contracts of the struggling business will be transferred via a sale to a new company.
There are also some potential funding options which could provide the financial lifeline with a struggling business needs.
However, in some circumstances, the company administrators may feel a liquidation is the best option for both the creditors and the company’s directors.
Can You Avoid Liquidation via an Administration?
While it is not uncommon for a company administration to result in a liquidation, it can also prove to be an effective method of avoiding liquidation and receivership.
There are some advantages associated with entering into an administration, including protection from personal liabilities and accusations of wrongful trading. Perhaps the primary benefit is the cessation of any legal action against the company while the administration is ongoing.
Once an administration order has been granted, an insolvency practitioner will be appointed as the administrator and assume full control of the company’s operations. At this time, the administrator is legally obliged to act in the best interests of the company’s creditors. They will formulate a recovery plan for the business (if they believe it’s in the creditors’ best interests) before proposing their plan to the creditors at the creditors’ meeting.
However, by acting in the best interests of the creditors and potentially allowing the company to continue to trade, the insolvent company can also benefit.
Is Going Into Administration Right for your Business?
There are some warning signs associated with an imminent insolvency. If your company is on the receiving end of creditor pressure or payment demands from HMRC, you should seriously consider contacting a turnaround practitioner at your earliest opportunity.
When you’re facing the threat of receivership or compulsory liquidation, a company administration presents one of the most attractive routes open to you provided the circumstances are correct.
What about a Company Voluntary Arrangement?
Alternatively, if the business is still viable despite its insolvent status, an experienced turnaround practitioner may propose a voluntary company arrangement, which allows the company to continue trading while it repays its creditors.
Need Advice on Whether Liquidation Vs Administration is the Right Choice?
If your business is facing insolvency, there are some options available to help you avoid liquidation. For a confidential discussion of your business’ circumstances, please speak to a member of our team today on 08000 746 757.