Administration and Liquidation are both formal insolvency processes for businesses who fit into the insolvency criteria. Although they are both governed by insolvency acts, they are very different and only apply in certain circumstances.
The two are often used interchangeably, leading to confused company directors and staff. Follow our guide below to understand the differences between the processes and how they can each affect your business.
What is Liquidation?
Liquidation is the process of bringing a registered business to a close and distributing its assets to any claimants. Liquidation happens when a company becomes insolvent, meaning they are unable to pay their obligations when they are due.
When a business is liquidated, the remaining assets are sold to pay creditors and shareholders the money they are owed, based on who has the highest priority.
Read through our company liquidation guide to see how the liquidation process works in full, and how it affects businesses.
What is Administration?
The administration process involves appointing a licensed insolvency practitioner to take over and run the company, taking the necessary steps to repay creditors.
Administration can act as a way to rescue a company by implementing an action plan for recovery. The company is protected by any legal action during the administration period.
The other two main objectives of an Administration are to offer returns of preferential or secured creditors; or to bring a better overall result than if the company was wound up.
View our company administration guide for detailed information on the entire process.
Is going into administration the same as insolvency?
No, administration is not the same as insolvency, but they are often confused as each other.
Administration is an insolvency procedure with the aims of rescuing a company; or the underlying business that a company operates.
Are liquidation and administration the same?
No, liquidation is not the same as administration.
Liquidation is almost always the end of a company with no potential of rescuing it, but administration is a rescue procedure put in place to minimise the chances of liquidation; or provide a better result for creditors before a company is liquidated.
Main differences between Liquidation and Administration
Whilst liquidation and administration are both formal insolvency procedures, they are very different processes which aim to achieve different outcomes.
In simple terms, liquidation brings the end of a company by selling its assets before dissolving the company entirely.
Administration is utilised when there is a chance of rescuing a business that is experiencing high levels of financial stress. If successful, company administration can lead to the complete recovery of a business, allowing the company to repay its debts and escape insolvency to continue trading. It can also allow the business and assets of a company to be sold to a newco; ensuring the continuity of that business.
In simple terms, the key difference between liquidation and administration is:
- Liquidation aims to close a company and Administration aims to rescue a company.
Can Liquidation follow on from Administration?
Yes, liquidation can and does frequently follow on from administration.
If the administration process has run its course, but there is still a need for investigations to be undertaken into the conduct of directors, then a Compulsory Liquidation may follow from administration.
This may also arise if creditors reject any of the administration proposals.
There are also some other resolutions that can result from administration too:
- Pre-Pack Administration: This is the legal process of selling a business to a third party, or to the company’s existing operating director under a new company name.
If the directors have the necessary funds, any assets and ongoing contracts of the failing business will be transferred to the new company.
- Finance: There are some funding options available which could provide a lifeline for struggling businesses.
Can I avoid Liquidation through Administration?
Yes, there is a chance that your business can avoid Liquidation after Administration – Liquidation does not always have to follow.
It is possible for a business to go straight from administration into dissolution, and therefore avoid liquidation altogether. This is only an option if all the purposes and objectives of the administration have been fulfilled.
Once a company goes into administration, an administrator is appointed. They are legally obligated to act in the best interests of the company, which is why a recovery plan is often formulated and therefore, allows that company to avoid going into liquidation.
Liquidation vs Administration: Which is best for your business?
Administration does tend to be better for a business as it looks at ways to rescue viable aspects of the business to allow for trade to continue. Liquidation however, simply closes the business in an orderly manner.
Whether your business needs to be Liquidated or put into Administration entirely depends on its current financial situation.
If you need some advice surrounding Liquidation and Administration, contact us today. Our experienced and professional team at The Insolvency Experts will listen to your individual case needs and help you to choose the most appropriate and viable insolvency option for you.