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Administration and liquidation are both insolvency procedures, however, they are both very different and will only be applicable in certain circumstances. Both relate to limited companies which are defined as insolvent yet the processes for both administration and liquidation are quite distinct, whilst also sharing some similarities.
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 businesses debt and if possible save the company. Administration is only a relatively temporary state rather than a long term solution 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.
An administration has three “statutory purposes” which the insolvency practitioners must adhere to:
- Rescuing the company as an ongoing concern.
- Or achieving better results for the company’s creditors as a whole, as long as it provides better results than if the company were to be wound up.
- Alternatively, insolvency practitioners must realise property or assets to make a distribution to one or more of the preferential creditors.
Liquidation – Creditors Voluntary Liquidation
Liquidation, on the other hand, is a terminal process which puts an end to the company. It can 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 through a different company.
Falling into insolvency is an unpleasant place to be for any business, and understandably can lead to a lot of sleepless nights and stress for directors and stakeholders, yet it doesn’t have to be this way. Being pro-active at the first signs of trouble will always yield a more favourable outcome, and if your business is starting to feel the pinch, contact us without delay for free, confidential advice.
Often, what procedure is best suited for your company will depend on its circumstances; how many creditors it has and whether they’re putting pressure on directors. There are a variety of options allowing you to recover the company and allow it to continue, or close the doors and put the company to bed.
Administration isn’t the only option to recover your company. If the core business has the potential to make a profit without its debts, you may be eligible for a Company Voluntary Arrangement (CVA). These arrangements allow you to remain in control of the company while repaying its debts. A CVA does require approval before it can be actioned, and it may not be suitable for all companies. If your debt is to HMRC, you can also apply for a Time to Pay Arrangement (TTP).
Both administration and liquidation are formal insolvency procedures, the pair share similarities, but have a slightly different purpose. The main difference between the two, is that administration can enable a company to continue trading, but only if it’s viable. There could be aspects of the business which work and jobs within the company could be saved, whilst other aspects of the business are sold. A liquidation will always end up with the company being closed down.
How we can help
If you’re unsure about the best procedure for your company and the right insolvency process, get in touch with us today for some free advice. We have eight experienced insolvency practitioners who will help guide you on the best route forward.