What’s the Difference Between Administration and Liquidation?
If your business is struggling financially, you may be looking for the best option to either save your company or wind up operations smoothly.
If your business no longer has the capacity to pay its bills, then as a company director you need to understand the difference between administration and liquidation. These two procedures are both responses to insolvency, but they’re different procedures with very different outcomes.
In this article, the expert team at Irwin Insolvency explains the differences between administration and liquidation to help you decide which is more suitable for your company’s financial situation.
The Difference Between Administration And Liquidation
Administration is a process that aims to save your company from insolvency. If your business goes into administration, it surrenders control of operations and all decision-making processes to a professional insolvency practitioner (the administrator). This administrator then does everything they can to turn the business around, pay off its debts, and ultimately become profitable again.
Liquidation results in the winding up of a company. This is the ultimate insolvency procedure, and it’s a decision that’s only taken when all other turnaround options have been exhausted. There are several different liquidation processes, but they all end with company assets being sold off in order to pay creditors, before the company is struck from the Companies House register.
Where administration salvages assets so that a company might start again, liquidation uses them to settle as much debt before closing down.
Administration and liquidation are two major options that a company can take in response to financial difficulties. Both have different outcomes, so it’s important to understand administration vs liquidation before committing your company to one or the other.
Both are formal insolvency procedures that must be authorised by a court of law and overseen by a licensed insolvency practitioner.
Let’s take a look at the two insolvency procedures in more detail, to understand which approach might be more appropriate for your struggling business.
What Is Administration?
If a company is facing mounting debts and pressure from creditors, one available option is administration. This is a formal, legally structured insolvency practice that can offer struggling companies the lifeline they need to turn their finances around and stop the business from winding up (being liquidated).
A company can enter into administration when it’s in an insolvent position. This means that the company can no longer pay its debts as and when they arise. Entering into administration ensures that the company can’t be chased by creditors, which buys valuable time for directors to reorganise or restructure and for debts to be reconsidered.
The administration process requires company directors to hand over control of their business to an appointed administrator, ideally a licensed insolvency practitioner. The administrator is legally appointed by a court, and they take over the day-to-day running of the company. They have the power to make operational decisions and are duty-bound to turn the business around.
The administration process will result in tough decisions being made. While the company as a whole might be saved from being wound up, major company assets may need to be sold off to pay creditors, and departments may need to be streamlined or closed down completely. A few of the changes and decisions an administrator can make include:
- Restructuring and reorganising the company
- Streamlining the company by cutting costs or making redundancies
- Selling assets to raise money
- Renegotiating supplier deals
- Renegotiating loans
- Entering into company voluntary arrangements (CVAs) with creditors
What Is the Administration Process?
Administration is a formal insolvency procedure and, as such, there’s a clear process that’s followed by the appointed administrator. A company generally enters into an administration period for 12 months, during which time the company is under the control of the administrator.
Here’s a step-by-step guide to the 12-month administration period:
- A business becomes insolvent and can no longer pay its debts.
- Company directors decide to enter into administration and appoint an insolvency practitioner to act as the administrator.
- Company directors produce a ‘Statement of Affairs’ detailing the company’s assets and liabilities.
- Company directors surrender control of the business to the administrator, who now has eight weeks to establish an action plan to pay creditors.
- The administrator sends their plan to creditors, who can accept or reject the action plan. If the plans are rejected, the courts arbitrate a decision.
- Once agreed upon, the administrator has 12 months to oversee the proposed plan. During this 12-month period, creditors can no longer take action against the company.
- After 12 months, the efforts of the administrator to save the business will be assessed. If successful, the company will have become solvent again and control can be handed back to the directors.
What Are the Benefits of the Administration Process?
Company directors will inevitably be reluctant to hand over control of their business to an outside administrator, but there are a number of clear advantages to be realised from the process. The major benefits of the administration process include:
- The company is protected against creditor action for 12 months
- The administrator brings outside knowledge, expertise, experience and ideas to the business
- The company has the opportunity to reorganise and restructure
- Debts and loans can be reorganised and renegotiated
- The company can be saved from liquidation
- The company can become solvent and profitable again
What Happens If Administration Fails?
If the company remains insolvent once the 12-month administration period is over, then it’s clear that the administration process has failed. This can happen for any number of reasons, and it could be the case that the business just isn’t profitable anymore. Markets or customer preferences could have changed, or the company’s debts may simply be too high.
If the administration process fails, there may still be other options available to the directors. If the administration process is looking positive, then it’s possible to extend the procedure by a further six months, if the courts agree, while there will still be options to renegotiate debts with creditors through company voluntary arrangements.
If the outlook is not positive, the company may need to be sold to a new owner, or it may need to be liquidated in order to pay creditors.
What Is Liquidation?
The main difference between administration and liquidation is that liquidation is a winding up procedure. While the administration process aims to save a company, liquidation aims to dismantle it as cleanly as possible.
There are multiple types of liquidation that can occur, including voluntary or compulsory liquidation, but they all result in the business being closed down, its assets sold, and the company struck from the Companies House register.
The three main types of liquidation are:
All three liquidation processes are driven by the need to sell company assets in order to either realise a profit or to pay debts that are still owed.
CVLs and MVLs are both voluntary processes that are initiated by company directors. Conversely, compulsory liquidation is initiated by creditors seeking to close the company down after attempting and failing to recoup the money they are owed.
Any liquidation process is final and, as such, should never be entered into lightly. Let’s take a look at the three different types of liquidation in more detail, to understand when and where they might be recommended by an insolvency practitioner:
Creditors’ Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation (CVL) is an insolvency procedure that begins when the company directors realise their insolvent position, and agree with the creditors to voluntarily liquidate the company.
A CVL is seen as a way to smoothly wind up the business, and agreements are made between the directors and creditors that ensure proceeds from the liquidation are divided evenly. A CVL is often overseen by a licensed insolvency practitioner who sells off the company’s assets and winds up operations.
Once assets have been sold, the company is struck from the Companies House register and ceases to exist. The directors will not be held liable for any outstanding debts that may be owed after this, unless allegations of fraud or misconduct arise.
Members’ Voluntary Liquidation (MVL)
A members’ voluntary liquidation (MVL) can only occur when the business is solvent, rather than insolvent. This is a voluntary winding up of the business, and directors might choose to do this in order to retire or to sell the company assets quickly and for a profit.
An MVL is a quick and efficient way to wind up a business, although the process must have the consent of the directors and shareholders to proceed. An MVL is overseen by an insolvency practitioner who assists with the sale of assets and ensures any debts are first paid off, before profits are taken.
Compulsory liquidation is not a voluntary process. This form of liquidation occurs when the company directors are forced into liquidation by their creditors, and it can be a messy and distressing time for everyone involved.
Creditors can forcibly liquidate a company in order to recoup debts they might be owed. However, this only generally happens once other means have been exhausted, and when the creditors see that no other option remains.
If a creditor is owed more than £750 and previous demands for payment have gone unpaid, they can apply to have the company liquidated. If successful, the company’s assets will be sold and the funds used to pay creditors.
The end result is the winding up of the company. Directors may be investigated by the Insolvency Service, and they can be found liable for outstanding debts if they are deemed to have acted fraudulently or against the interests of the company.
How to Decide Between Administration And Liquidation
Administration, liquidation: Now that you understand the difference between these two insolvency procedures, it might be clear which option would be best for your company.
If your company has become insolvent, then in most circumstances it’s desirable to try and save the business first. This is often in the best interests of creditors who wish to recoup the money owed to them, as well as the directors and employees of the company. Administration is therefore an excellent option, as it offers your business a chance to reorganise, restructure, pay its debts, and continue trading.
However, the administration process will only work if the company has the potential to be saved. In order to be a good candidate for administration, the company should still hold value, have sizable assets and have the ability to turn a profit again in the future.
If a company has few assets left or if it’s clear that administration would only stall the inevitable, then voluntary liquidation may be the best option. Voluntarily winding up a company is preferred to waiting for compulsory liquidation, as a CVL provides company directors with more control over the liquidation process.
If administration isn’t a suitable option, there may also be other options available to companies before they need to liquidate. This includes debt consolidation plans, company voluntary arrangements and corporate restructuring options.
In any case, it’s highly recommended that company directors seek impartial advice from an insolvency expert. Every business is in a unique financial situation, and an experienced insolvency practitioner can suggest the best insolvency procedures for your company to take.
Contact Irwin Insolvency for More Information on the Difference Between Administration and Liquidation
Irwin Insolvency has over 25 years’ experience assisting struggling businesses through insolvency procedures.
Our expert team of insolvency practitioners has the experience and knowledge your company needs to decide if administration or liquidation is the correct step forward.
If you need to know more about the difference between administration and liquidation, contact Irwin Insolvency today for more information.