What is the difference between liquidation and administration?
Administration and Liquidation are both insolvency processes governed by the 1986 Insolvency Act. They are often confused. This page outlines the two by explaining their definition as welll as exploring some of the main differences between them.
What is Administration?
Administration involves appointing a licensed insolvency practitioner to a company as it becomes insolvent and can no longer pay its debts. Administrators take over and run the company, taking necessary action to repay creditors. A restructuring and recovery plan is made and implemented and a moratorium is put around the company, whereby they are protected from any legal action during this period. The administrator assesses the companies' viability.
After 14 days of entering administration, employment contracts of the company are taken on by the administrators. Hence, it is favourable for the company to be sold out of administration before this date. If it can’t be sold then usually the company ceases trading and enters liquidation.
Overall, the idea of administration is to try and prevent the company from having to enter liquidation in the first place. It tries to turnaround and rescue a company i.e. breathing space to consider a CVA.
Administrators are duty bound to always act in the best interest of the creditors.
What is Liquidation?
Liquidation can be most simply defined as the process of ending a company, by selling off all assets in return for funds, which pay the creditors. An insolvency practitioner works with the company to do this.
Liquidation can occur after administration, if it failed to work, as the company will be left with no other choice than to close.
The difference?
Most importantly, administration is an insolvency procedure which aims to rescue the company, whereas a liquidation almost always results in the end of the company.
Another difference is that administration can occur when the business has cash flow problems, but the business is viable and may need the protection of the creditors, whereas liquidations occur when the company is no longer viable and becomes insolvent (except in the case of a MVL).
During the time of which a liquidation is proposed and a liquidator appointed, a creditor could begin or complete legal action against the company. This contrasts to when a company enters administration and a moratorium period gives protection over any legal action from creditors.
In some cases, administration is more time bound than a liquidation. As it is a race to rescue the company, administrations have a limit of 12 months maximum. However, liquidations, of which close a company, are non-time bound.
Categories: What is administration