Administration vs Liquidation – What’s the difference?
It sounds like an odd boxing match. But in the battle of administration vs liquidation, who comes out on top?
Both financial mechanisms exist to deal with insolvent companies. Chances are unless you work within insolvency or financial services or have been unfortunate enough to go through such proceedings, you probably won’t know the difference between administration and liquidation.
The press doesn’t help, the moment a high street company gets into financial trouble, there is no end to constant reporting and speculation. Yet it’s very rare for a news reporter to actually define the terms. Can you remember the last time you saw a news junket titled ‘administration vs liquidation?’
You may have wished for one, though. The new year, new start feeling of ‘this is it, the year that business will boom!’, can soon be diverted by an outstanding HMRC bill, overdue rent collection or the revelation of sizeable credit card balances.
You’ll know the sickening feeling of a company falling into insolvency, and it is at those times you need a clear definition of both terms.
In the interest of clarity, the two processes are separate. Yet they share some common elements.
What is the difference between administration and liquidation?
If the circumstances are right, administration can save a business, aiding the restructuring of companies. Administration will not always be appropriate but is an alternative to liquidation providing the right circumstances and a viable business. A company is usually put into liquidation following a winding-up petition that a creditor will issue. However, the directors of a company can also issue this.
The difference between administration, liquidation and their relevancy to the task is governed by the desired fate for the company. Liquidation is the route to take to wind-up and finish the company entirely. If all or some of the business needs rescuing, administration is the mechanism to go for. If the business is large, with several sub organisations, it may be a mixture of both.
In this theoretical battle of administration vs liquidation, there is unlikely to be a victor. The two terms share a common bond due to the part they play in dealing with insolvent companies, but their application depends on the situation, alongside the commercial desire of the board and company owners.
They share other common traits. For example, both procedures are managed by licensed insolvency practitioners and relate to limited companies who are deemed insolvent. They will be insolvent by definition because they are unable to make day to day payments or because liabilities outweigh assets on the company’s balance sheet.
However, the processes are quite distinct. Let’s drill into the detail. What makes them different?
3 Facts about administration
- It is a temporary state, giving administrators time to devise a rescue strategy.
- It protects from creditor action and further deterioration of business finances.
- It minimises the possibility of legal action against the directors personally. This is only if immediate action is taken.
3 Facts about liquidation
- It involves the sale of company assets to make payments to creditors on a pro-rata basis.
- It can provide the lifeline a business needs to continue trading, under a different legal entity.
- It can provide peace of mind, as company debts will be repaid as far as possible.
The two processes are separate, yet they do share some common elements.
The Administration Process
Administration is a powerful tool used, in the first instance, to place the company in a kind of protective bubble. The process halts creditor action giving administrator’s time to devise a strategy to repay company debts and save the business. An administrator’s primary duty is to rescue the company, but the administrator must perform these duties in the interests of the company’s creditors.
Administration is a relatively temporary state. The administrator has a period of twelve months, which can be extended, and creditors and courts allow, to attempt a company rescue. During this period, the company is protected from any claims, but administrators will be gathering information and data in order to assess the viability of the business and decide the best way of leaving administration.
The Liquidation Process
A company will go into liquidation following a winding-up petition from a creditor. However, directors of the company can also issue this. It is a terminal process which will put an end to the company. This can also follow an administration period, where no further prospect of debt repayment is found.
Liquidation sees the assets of the company sold off or released in order to make payments to creditors on a pro-rata basis. It is worth noting that this does not necessarily mean killing off the business. In some cases, the directors can purchase back the assets at market value and continue trading as a different company.
In summary
So, administration vs liquidation, which one is right for your company? Falling into insolvency is an unpleasant place to be for any business. Understandably, it can lead to a lot of sleepless nights and stress for directors and stakeholders, but it doesn’t have to be this way. Being proactive at the first signs of trouble will always yield a more favourable outcome. Any business that is starting to feel the pinch should seek the advice of licensed insolvency practitioners without hesitation.
Considering which route to take can be daunting; therefore, we recommend getting in touch with ourselves for professional advice before going ahead with any of these proceedings.
If your business is struggling with debt and risks becoming insolvent, you should speak to us as soon as possible. Our initial advisors can provide you with free, impartial advice with no obligation, and help guide you along the path most suitable for you and your business.