Liquidation vs. Administration

What’s the difference between Liquidation and Administration?

Liquidation vs. Administration

Liquidation and Company Administration are formal insolvency procedures companies can use to resolve their financial issues. The primary aim of Administration is to rescue and recover the company so it can return to profitability, while Liquidation is the process of selling a business’s assets to repay its debts before it closes. 

These two procedures are often misunderstood, which can lead to confusion at a time when company directors need to be very clear about their options. With that in mind, we’re here to explain the difference between Liquidation and Administration, the pros and cons of the two procedures and when they could be the right approach for your business.

What is Company Administration?

Company Administration is the more hopeful of the two procedures. Its primary aim is to rescue and restructure the company to return it to profitability so it can be handed back to the directors. If that’s not possible, the administrator could sell the company as a going concern, sell parts of the business or work to secure a better return for the creditors than if it entered Liquidation. 

The company directors, a creditor or the court can initiate the Administration process by appointing a licensed Insolvency Practitioner. Acting as the administrator, they will take control of the company, assess its financial position, and develop and execute a plan to achieve one of the goals of Administration. During that time, the company is protected from creditor legal action so the administrator can fully consider their options. 

Their plan may include streamlining the business, renegotiating contracts, making staff redundancies and restructuring debt using a Company Voluntary Arrangement (CVA). If the company cannot be rescued and the creditors’ return has been maximised as much as possible, it can proceed to Liquidation.

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What are the advantages and disadvantages of Administration?

Advantages

• It may be possible to save the company so it can continue trading
• The company is protected from its creditors so it can restructure without the threat of legal action
• It can help to protect jobs 
• Financial restructuring can make the business more attractive to prospective buyers
• It can provide a better return for creditors than entering straight into Liquidation

Disadvantages

• The directors must hand over control of the company and its affairs to the administrator and the sale of the business could lead to their removal
• It can damage the reputation of the company if it does continue to trade
• It can be expensive - the cost will depend on how long the company is in Administration for
• Business restructuring and partial closures can lead to job losses
• The conduct of the directors will be investigated and could lead to penalties if there’s evidence of misconduct or unlawful trading

What is Liquidation? 

When a company becomes insolvent, its directors are legally required to protect its creditors from further losses. If the company has unmanageable debts and is beyond the point of recovery, Liquidation will likely be the only appropriate route to take. 

The directors can liquidate the insolvent company voluntarily using a procedure called Creditors’ Voluntary Liquidation (CVL). You must appoint an Insolvency Practitioner to act as the liquidator. They will wind down the business’s affairs, bring any contracts to an end and make employees redundant. 

The liquidator will also sell the company’s assets and use the proceeds to repay its creditors in a strict order. Any remaining debts will be written off and the business will be removed from the Companies House register. As long as you have met your legal duties as a director, you will not be liable for any of the company’s debts so you can start afresh. 

What are the advantages and disadvantages of Liquidation?

Advantages

• It deals with company debts in a legal and organised manner
• Ordinarily, the directors are not liable for debts the company cannot pay
• Directors who receive a salary under PAYE for at least two years may be eligible for redundancy pay
• It limits creditor losses and shows you are taking your duties as a director seriously
• It brings an efficient end to the stress and pressure of running a failing business 

Disadvantages

• The company will be closed and you will not be able to trade using the same or a similar business name for five years
• All employees and directors will lose their jobs
• Unsecured creditors like suppliers may lose money
• Directors have to repay overdrawn loan accounts and you will be liable for any company debts you have personally guaranteed
• The conduct of the directors will be investigated and could lead to penalties if there is evidence of misconduct or unlawful trading

What are the key differences between Liquidation and Administration?

If you believe your company is insolvent, contact an Insolvency Practitioner immediately. They will explain the differences between Liquidation and Administration, consider other rescue methods, and help you determine the most appropriate course of action.

Outcome

• Administration is more flexible than Liquidation and has a greater range of outcomes. The main objective is to rescue the company and return it to profitability. However, it could also be sold to a new owner, restructured or liquidated, depending on its viability, 
• Liquidation always leads to the company’s closure. The aim is to pay the outstanding debts as far as possible and bring an end to it as a legal entity.  

Trading position

• Administration can help companies with serious cash flow problems but a viable underlying business model.
• Insolvent Liquidation is suited to businesses that cannot pay their debts and have no realistic prospect of a recovery. 

Duration

• Administration ends automatically after one year. The liquidator can end it early if they have achieved their aims or apply to the court for an extension of up to 12 months.
• Straightforward insolvent liquidations can be completed in a few months, but more complex cases can take up to a year. 

Creditor approval

• Administrators must get approval for their proposals from the company’s creditors. If the creditors reject their plans, the administrator must modify them or put the company into Liquidation. 
• Liquidators do not have to seek approval from the creditors as their plan is always the same. 

Interests 

• In Administration, the Insolvency Practitioner considers the interests of the company and its creditors.
• In insolvent Liquidation, the sole aim of the liquidator is to maximise the creditors’ returns. 

Costs

• Administration usually costs more than Liquidation due to the time it takes and the complexity of the issues the administrator must deal with.
• In comparison, you can liquidate an insolvent company relatively cheaply. A straightforward Creditors’ Voluntary Liquidation costs around £4,000, and the fees can be covered by the sale of assets or the director’s redundancy pay.    

Liquidation or Administration: Which is right for you? 

The right procedure for your company depends on its financial difficulties, the viability of its underlying business model and the appetite of the directors and shareholders to save it. We have supported over 25,000 company directors in a similar position and will assess your situation, clearly explain your options and provide guidance on the best approach. 

Contact our team of licensed Insolvency Practitioners for a free, same-day consultation or arrange a meeting at one of our offices in your area.