The chances are that unless you work within insolvency or financial services, or have been unfortunate enough to have been involved with a company going through such proceedings, you probably won’t know the difference between Administration and Liquidation. You may well have heard the terms, as the moment a high street company gets into financial trouble there seems to be no end to the incessant reporting and speculation, yet it’s very rare for a news reporter to actually define the terms.
I used to think that perhaps they were never defined for a reason, and that it was the industries way of enshrouding themselves in a haze of mystique and wonder in order to justify charging large fees. Now however I know better, and in the interest of clarity the two processes are separate, yet they do share some common elements.
For example, both procedures are managed by licensed Insolvency Practitioners, and both relate to limited companies who, in the most part, are deemed to be insolvent. They will usually be defined as insolvent either because they are unable to make day to day payments for the running of the business, or because liabilities outweigh assets on the company’s balance sheet. However the processes are quite distinct.
Administration is a powerful tool used in the first instance to place the company into a kind of protective bubble, which halts creditor action and gives the administrators time to devise a strategy to repay the businesses debt and save the business if that is at all possible. Administration is only a relatively temporary state though, and during this period the administrators will be gathering information and data in order to assess the viability of the business, and what the best way of leaving Administration might be. Typically, Administration lasts up to one year, although this can be extended if required and the creditors and/or courts allow it.
Read more about Administration.
Liquidation on the other hand is a terminal process which puts an end to the company, and can also follow an Administration period where no further prospect of repaying the company’s debt has been found. Liquidation sees the assets of the company being sold off or realised in order to make payments to creditors on a pro rata basis. It is worth noting however that this does not necessarily mean killing off the business, as in some cases the directors can purchase back the assets at market value and continue trading as a different company.
Read more about Liquidation.