Liquidation vs Administration

Liquidation and administration are two distinct processes that a struggling business may consider as a means to resolve its financial difficulties. While both aim to deal with insolvency, their methods and outcomes differ significantly.

This article aims to provide a comprehensive comparison between the two, elucidating the legal, financial, and operational implications of each option.

What is the Difference Between Liquidation and Administration?

Liquidation and administration are both insolvency procedures, but they serve different purposes and result in different outcomes for a business.

Liquidation

Liquidation is the process of closing a company via selling off a company’s assets to pay debts. Once this is done, the company is dissolved, ceasing to exist. Liquidation is often seen as a terminal solution, as it leads to the closure of the business. It primarily benefits the creditors, aiming to return as much money as possible to them. There are two main types of liquidation: compulsory, which is court-ordered, and voluntary, which is initiated by the company’s directors.

Administration

Administration, on the other hand, aims to help the company survive. An insolvency practitioner takes control of the business to either rescue it as a going concern or to achieve a better result for the creditors than would be possible through liquidation. Administration may lead to restructuring, sale of the business, or, if rescue is not possible, a more orderly liquidation.

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

Key Differences Between Liquidation and Administration

1. Objective: Liquidation aims to wind up the company, whereas administration seeks to save it or, at the very least, mitigate losses for creditors.
2. Control: In liquidation, control remains with the liquidator, who disposes of assets to repay creditors. In administration, an insolvency practitioner takes charge with a focus on restructuring or selling the business.
3. Impact on Employees: Liquidation usually results in all employees losing their jobs. In administration, there is a possibility that the business, or parts of it, can continue to operate, preserving some employment.
4. Creditor Involvement: Creditors have more involvement in a liquidation process, often forming a committee to approve key decisions. In administration, creditors have less direct control over the process.
5. Timescale: Liquidation is generally a quicker process focused solely on asset disposal. Administration can be more time-consuming, given the complexities of trying to save or restructure the business.
6. Legal Proceedings: Once in administration, a company is generally protected from legal action by creditors, giving it breathing space to explore rescue options. This is not the case in liquidation.

Can a Liquidation Follow an Administration?

Yes, liquidation can follow administration, but it is not the only possible outcome. Here are some other potential resolutions:

• Pre-pack administration: This is a legal process for selling the business to a third party or to the company’s existing directors operating under a new company name.
• Funding options: There are also some potential funding options that could provide the financial lifeline a struggling business needs.

However, in some cases, the company administrators may decide that 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.

Can You Avoid Liquidation via an Administration?

Yes, it is possible to avoid liquidation via administration. In fact, that is the primary goal of administration: to rescue the company and avoid liquidation altogether.

There are several benefits to entering administration, including:

• Protection from creditors: Administration provides a moratorium on legal action from creditors, giving the company a breathing space to develop a recovery plan.
• Cessation of legal action: Once an administration order is granted, all legal proceedings against the company are automatically stopped.
• Focus on restructuring: The administrator will work with the company’s management to develop a recovery plan that is in the best interests of the creditors. This plan may involve restructuring the company’s debt, selling off assets, or finding new investors.

If the administrator is able to develop a successful recovery plan and implement it, the company can avoid liquidation and continue to operate.

Need Advice on Whether Liquidation or 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 0800 074 6757.