Differences between liquidation and administration

While liquidation and administration are both formal insolvency processes, the key difference is that administration looks to rescue viable elements of a business to allow trade to continue, while liquidation is simply a way of closing a company in an orderly manner. While administration does not guarantee the ongoing survival of the company in question, this is often one of the driving aims of the process. With liquidation, however, there is only one outcome and that is the full closure of the business and the removal of its name from the register of companies held at Companies House. 

Here we look at the differences between the processes and how they can each affect your business.

What is liquidation?

Liquidation is the process of bringing a registered company to an end 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. 

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. 

Both processes are different and aim to achieve different outcomes. Simply put, liquidation aims to close a company and Administration aims to rescue a company.

Can a liquidation follow on from administration? 

Yes, the liquidation of a company can often follow administration. However, the administration process gives the company the opportunity to potentially pursue a pre-pack sale and funding options all of which provide the hope of being able to continue operating in a debt-free (new) company. If the administrator believes that liquidation is the most likely outcome, they’ll prepare the directors for the final dissolution phase with the appropriate guidance.  

Potential resolutions that can result from an administration are:

Pre-Pack Administration

A pre-pack administration is a legal method of selling the business to a third party, or to the company’s existing directors operating under a new company name.

In some cases, if the directors have the necessary funds, the assets and ongoing contracts of the struggling business will be transferred via a sale to a new company.

Finance

There are also some potential funding options which could provide the financial lifeline that a struggling business needs. However, in some circumstances, the company administrators may feel a liquidation is the best option for both the creditors and the company’s directors.

Can this be avoided? 

Yes, there is a chance that your business can avoid liquidation after administration – liquidation does not always have to follow.  

Although a company administration could end in liquidation, it can also be used to avoid liquidation or receivership. One of the main advantages of entering into administration is that all legal action against your company is stopped during the period of the administration. As soon as the administration order is granted an insolvency practitioner is appointed as administrator, assuming full control over the company operations temporarily. During this time the insolvency practitioner will formulate and propose a recovery plan, seeking the approval of the insolvent company’s creditors during the creditors’ meeting. The administrator is legally obligated to act in the best interest of the creditors. However, by facilitating the repayment of as many debts as possible the administration process also benefits the standing of the insolvent company.

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 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. 

The services and solutions offered in identeco’s Business Support Toolkit provide businesses with reliable, accurate financial information and analysis on over 5 million UK limited companies, enabling our clients to make smarter business decisions such as assessing credit risk and receiving alerts to notify you should a company be nearing administration or insolvency. You can find out more here.