The difference between administration and liquidation
Administrations and Liquidations are both insolvency procedures governed by the 1986 Insolvency Act. They are often confused. This page outlines the two and the main differences.
What is Administration?
Administration involves the appointing of licensed insolvency practitioners when a company becomes insolvent and can no longer pay its debts. Administrators take over the running of the company in order to repay creditors. Recovery and restructuring plans are made and implemented. A moratorium is put around the company, whereby they are protected from any legal action during this period.
After 14 days in administration, the 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 the usually the company ceases trading and then enters liquidation.
Overall, the idea of administration is to try and prevent the company from having to enter liquidation in the first place.
Administrators are duty bound to always act in the best interest of the creditors.
What is Liquidation?
Liquidation can be 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 most vital 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.
Categories: What is administration