When a company experiences serious financial difficulties, directors may be unsure of what to do next. Fortunately, there are legal procedures to help businesses either recover or close down in an orderly fashion. Two of the most common options are Liquidation and Administration.
Though both apply to insolvent businesses, they are very different in process and outcome.
What is Liquidation?
Liquidation is the formal process of closing a company and selling its assets to repay creditors. Once the process is complete, the company ceases to exist. A licenced Insolvency Practitioner, referred to as the Liquidator, manages the entire process.
Liquidation is typically the final step for a company. It ends all trading and dissolves the business permanently. There are three main types of liquidation.
Members’ Voluntary Liquidation (MVL)
For when the company is solvent. Directors choose to close the business, and the liquidator distributes remaining assets to shareholders after paying all debts first.
Creditors’ Voluntary Liquidation (CVL)
For when a company is insolvent and cannot meets its obligations. Directors choose to wind up the business, and the liquidator sells company assets to repay creditors. They then write off any unpaid debts unless secured by a personal guarantee.
Compulsory Liquidation
Initiated by court order, usually following a creditor’s petition. This forces a company into liquidation if it fails to resolve outstanding debts.
What is Administration?
Administration gives struggling businesses a chance to recover. A licensed Insolvency Practitioner, referred to as the Administrator, takes control of the company. Once the company enters administration, it benefits from an automatic legal protection called a Moratorium, which prevents creditors from taking legal action.
The administrator works to rescue the company or its core business by:
- Restructuring debts to improve cash flow
- Closing loss-making parts of the business
- Selling the business as a going concern
One option administrators use is a Pre-Pack Administration, where they arrange the sale of the business in advance which completes shortly after the company enters administration.
Sometimes, administration leads to a Company Voluntary Arrangement (CVA), which is a formal agreement that allows a business to repay its debts over time while continuing to operate.
Differences Between Liquidation and Administration
While both are formal insolvency processes, their purposes are effects vary greatly.
1. Purpose
- Liquidation aims to close the company and distribute its assets.
- Administration aims to save the company or secure a better outcome for creditors.
2. Legal Protection
- Liquidation does not provide legal protection until a liquidator is appointed.
- Administration provides immediate legal protection through a Moratorium.
3. Impact on Employees
- In liquidation, employees usually lose their jobs immediately.
- In administration, staff may remain employed which is especially so if the business continues trading or is sold.
4. Timeframe
- Liquidation can take months or even years, depending on the complexity of the case.
- Administration typically lasts up to 12 months but can be extended with creditor approval.
5. Final Outcome
- Liquidation ends the company immediately.
- Administration may result in recovery, sale or transition into liquidation if rescue effort fail.
Can Administration Lead to Liquidation?
Yes, this happens frequently.
If an administrator concludes that they cannot rescue or sell the business, the company may enter a Creditors’ Voluntary Liquidation. This allows the liquidator to properly distribute any remaining assets.
Occasionally, if administration meets all its objectives, the company may be dissolved directly without undergoing a separate liquidation process.
Is Administration Always Better Than Liquidation?
Not necessarily.
Administration is often preferable if the business has a realistic chance of recovery or a valuable core operation. It protects jobs and preserves contracts, which may result in stronger business emerging from the process.
However, if there is no chance of turning the company around, liquidation provides clear and structured way to close the business.
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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK laws and regulations are subject to change. Please speak to a professional for advice tailored to your individual circumstances. Pi Credit Management accepts no responsibility for any issues arising from reliance on the information provided.