Difference between liquidation and administration

Liquidation and administration are two common insolvency procedures used when a company faces financial distress. Both aim to deal with companies that can no longer pay their debts and continue trading viably but they work in different ways.

Liquidation involves selling off a company’s assets and using the proceeds to pay off its debts. Liquidation typically leads to the closure of the company.

Administration is an insolvency procedure where the affairs and assets of a company are managed by an appointed administrator. The goal is to rescue the company as a going concern, or achieve a better outcome for creditors than liquidation. The company may be able to continue trading under administration.

What is liquidation?

Liquidation is the process of closing down a company and selling off its assets to pay off its debts. It involves appointing a licensed insolvency practitioner, acting as a liquidator, to oversee the process. The liquidator takes control of the company, stops all trading activities, assesses its assets, pays off creditors and dissolves the company.  

There are two main types of liquidation:

Solvent liquidation – A solvent liquidation occurs when a solvent company decides to close down its business voluntarily. The company is able to pay all its debts and meet its financial obligations. 

The directors make the decision to cease trading and liquidate the assets to distribute to shareholders. This is an orderly process where the company can maximise the returns to shareholders by benefitting from a more tax efficient distribution of capital, than would otherwise be available through traditional dividends. 

Solvent Liquidation is typically seen as an option when the company has reached the end of its natural lifecycle and in many cases, where there is no obvious succession plan. On this basis, solvent liquidation is often used by business owners who are looking to wind down their affairs and either retire, or move onto different projects.

Insolvent liquidation – An insolvent company usually considers liquidation as one of the options when it’s facing severe financial problems and sees no way to get back to trading profitably. It allows the company to pay off its debts in an orderly manner to the extent of available assets, before shutting down operations completely.

Why choose an insolvent liquidation?

Ends financial distress – Liquidation provides an orderly way to wind down an insolvent company and bring its financial troubles to an end, as the liquidation of assets pay back the company’s debts as far as is possible. 

Pays creditors – The main aim of liquidation is to sell the company’s assets and use the proceeds to pay its creditors. Secured creditors and preferential creditors like employees get paid ahead of trade creditors. If there are any funds left, unsecured creditors are paid too.

Stops further liabilities – Once liquidation starts, no more debts can be built up. This prevents the situation getting worse and creditors losing even more money. Ongoing liabilities like rent and payroll come to an end.

Allows director(s) to move on – Often, insolvency happens through no fault of the director(s). Ending the company allows the director to stop worrying about its affairs and focus on new business ventures.

What is administration?

Administration is a legal process that allows financially distressed companies to continue operating under the supervision of a licensed insolvency practitioner. The purpose of administration is to rescue the company, achieve a better outcome for creditors than liquidation, or sell the business as a going concern to pay off debts. 

The process begins when an administrator is appointed to take over management of the business. The administrator aims to turn around the fortunes of the company to avoid having to liquidate. They may do this by raising new finance, renegotiating with creditors, selling assets or parts of the business or closing down unprofitable operations.

During administration, there is a moratorium which gives the company temporary relief from creditors’ legal action to allow the administrators time to act. The administrator will work to produce proposals to creditors on the future of the company within eight weeks of appointment. Possible outcomes include adjusting the business model to return the company to solvency, selling the business as a going concern, or moving to liquidation if rescue is not possible.

Why choose an administration?

Company can continue trading – The administrator will try to continue running the business as usual while attempting to turn things around. This avoids an immediate shut down which can help to maximise return to creditors.

Chance of recovery – With the breathing space provided, there is an opportunity to restructure debts or find an investor or acquirer so the company can offer creditors a better outcome. Administration provides time to determine if the business can be saved.

Lowers stress for owners – Directors step back from day-to-day management during administration. An experienced insolvency practitioner will take charge to make important decisions.

Protects from creditor action – There’s an automatic moratorium blocking enforcement or legal action from creditors. This prevents debt recovery action being taken while the company gets help.

Seeking professional help

When a company faces financial distress, it can be tempting for directors to try to handle matters on their own. However, the legal and financial complexities often require professional guidance from an experienced insolvency practitioner. 

An insolvency practitioner is a licensed professional with expertise in insolvency law and procedures. We have the knowledge and skills to advise directors on whether administration or liquidation is more appropriate for their company’s situation. Our guidance can also help directors avoid personal liability.

If you think your company could benefit from the advice of a licensed insolvency practitioner, our expert team is on hand to take your questions. We don’t have a call centre. Instead, when you get in touch you’ll speak to someone who has the expertise to give you the answers you need. We’ll explain your options and you’ll decide on the best way forward.

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