What is the difference between liquidation and administration?
Administration and Liquidation are both insolvency processes for limited companies who meet the insolvent criteria. Both are governed by the 1986 Insolvency Act. This being said, the processes are very different and each only applicable in certain circumstances. The two are often confused – This page outlines the two processes by explaining their definition as well 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.
The process is temporary and not long term – it runs for typically a year, unless courts and creditors allow this to be extended.
Administrators must adhere to the following statutory purposes for their role: So the aims of administration are the following;
- Rescue the company as a going concern
- Realise property or assets in order to distribute to one or more preferential creditors
- Achieve better results for company creditors overall; better than if it was wound up
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. However, administrators are duty bound to always act in the best interest of the creditors.
What is Liquidation?
Liquidation is the process of selling off or realising company assets in return for funds, from which pay the creditors. Usually this happens after the company has stopped trading. An insolvency practitioner works with the directors to do this. The end stage of liquidation is formal dissolution and removing the company from the register at Companies House.
Liquidation can occur after administration, if it failed to work, as the company will be left with no other choice than to close.
There are two types of liquidation: creditors voluntary and compulsory; one being instigated from creditors needing debts paid off and the other being instigated by the court following winding up petitions from creditors.
Note: not always does liquidation mean the literal end for a business. Directors are able to purchase back the assets as market value and trade through a different company. Be aware though that there are strict rules on reusing company names.
So, What Are The differences?
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