Liquidation vs Administration: The Differences

Many people mix up the distinction between Liquidation vs Administration. However, with administration, there’s a chance to restructure the business. In this piece, we’ll explore the key contrasts between liquidation and administration. As both are formal insolvency procedures.

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Key Differences

Both phrases are sometimes used interchangeably. However, there are several distinctions between the two procedures. In reality, it’s crucial to understand key difference in what each entails before deciding on how to proceed and deal with an insolvent company.

When a company is liquidated, its assets are distributed to its creditors and the business is shut down. An administrator takes control of the running of the business during this process. The assets will be distributed via a liquidator.

The speed of the process is where the key distinction between liquidation and administration lies. If you decide to shut down your firm, you must act swiftly. You don’t want to wait because you can’t pay your bills any longer.

If you decide to opt for Administration, you’ll have some breathing room to reorganize your finances. Depending on the case, it may be possible to keep trading during this time. After the administrators finish their work, everything can go back to normal.

What is Liquidation?

Liquidation, often termed ‘winding up’, represents the procedure where a company’s assets are sold off to pay creditors and the business is ultimately closed down and deregistered with Companies House in an orderly manner.

A company is said to be insolvent when there is no hope of them being able to pay off company debt. In this case, a liquidator will be appointed by the courts to control the process. The liquidator is basically a licensed professional who specialises in these cases and will work under the court’s supervision.

The goal is to shut the company while leaving nothing behind that could create future issues. A company’s insolvency can cause liquidation, or the company may choose to close down on its own. If either happens, the person in charge of liquidating must find out how much the assets are worth and what company debt is owed.

After the company sells its assets, the company’s creditors are paid. If the company cannot pay its debts, liquidation occurs and the liquidator takes control of any remaining assets, including the company name.

Types of Liquidation

Within the context of liquidation, it’s important to understand that there are different types. These are primarily categorised into Creditors’ Voluntary Liquidation (CVL), Compulsory Liquidation, and Members’ Voluntary Liquidation (MVL). Each has unique characteristics and implications.

1. Creditors’ Voluntary Liquidation (CVL): This type of liquidation is initiated by the directors of a company when they realise that the business can no longer meet its financial obligations. In a Creditors Voluntary Liquidation, the creditors have the ultimate say in appointing a liquidator, who will then oversee the process of selling the company’s assets to pay off debts.
2. Compulsory Liquidation: This is a forced liquidation initiated by a creditor of the company through a court order. It usually occurs when a company is unable to repay its debts, and the creditor has petitioned the court to reclaim the outstanding amount. The court appoints an Official Receiver from the Insolvency Service to manage the process.
3. Members’ Voluntary Liquidation (MVL): This is a voluntary process initiated by the directors of a solvent company. It’s often used when directors wish to retire or if they no longer want to continue with the business. In an Members Voluntary Liquidation, a liquidator is appointed to realise the assets of the company and distribute the proceeds amongst the shareholders.

Each type of liquidation has its own procedures and implications, and the best course of action will depend on the company’s specific circumstances. It’s crucial to seek professional advice to understand which option may be most suitable.

What is Administration?

An administration is a solution that, when the company is insolvent, gives legal protection from company creditors. At the same time, the insolvency practitioner has the opportunity to save the struggling business, by assessing its financial position and whether it can be saved.

Although it is not always an option, an Administration may be utilised to turn the company around. A company can come out of Administration by restructuring its debts and operating under a Company Voluntary Arrangement (CVA) and the company is returned to its directors.

If it appears that there is no way to make the company profitable again, the company will go into liquidation. This process starts with appointing a Licensed Insolvency Practitioner (IP) to manage everything.

The Licensed Insolvency Practitioner will decide whether to continue with the liquidation procedure or entrust the management of the firm to a receiver. To satisfy creditors and pay out any remaining cash to shareholders, the receiver will sell off company assets.

Pre-Pack Administration

A specific type of administration worth mentioning is ‘Pre-Pack Administration’. This is a structured and planned process where the sale of all or some of the assets of a company in administration is negotiated with a buyer before the appointment of the administrator.

The process is often swift, with the sale usually completed immediately upon appointment of the administrator. The main benefit of a pre-pack administration is that it allows for the continuity of the business and can preserve jobs, whilst maximising the return to creditors by selling the business as a going concern.

This type of administration is highly regulated and must meet stringent requirements to ensure fairness and transparency. For instance, an independent valuation of the business assets must be carried out and the administrator must demonstrate that a pre-pack sale achieves the best possible outcome for all creditors.

Pre-pack administration can be a viable option for companies with substantial assets that are at risk of rapid devaluation, or where the business would benefit from a swift transfer of control. It’s essential to seek professional advice from a licensed Insolvency Practitioner to determine if a pre-pack administration is the right route for your company.

If you’re considering Pre-Pack Administration as an option, it’s important to understand the process fully. Our Pre-Pack Administration guide provides a detailed walkthrough.

Administrative Receivership

Administrative Receivership is another insolvency procedure to consider. This process is initiated by secured creditors who hold a floating charge debenture, typically a bank, to recover the money they’re owed by the company.

The Administrative Receiver is appointed with the primary objective of realising enough assets to repay the debt owed to the secured creditor who initiated the receivership. Unlike administration, the focus is not necessarily on saving the business, although this can be a positive outcome in some cases.

In an Administrative Receivership, the receiver takes over the management of the company from the directors. They have the power to run the company, sell assets, and, if necessary, make employees redundant to repay secured creditors.

It’s worth noting that since the Enterprise Act 2002, the ability to appoint an Administrative Receiver has been significantly restricted, and it’s no longer possible for floating charges to be created that allow for this option, except in certain specific circumstances.

Although less common now, understanding the process and implications of Administrative Receivership can be vital, especially for older companies that may still have floating charges created before the Act came into force.

Legal Requirements

The goal of going into Administration is to avoid liquidation altogether to keep it afloat.

Administrators are legally bound to uphold three specific goals:

• To save the company
• There will be better realisations of assets than if they had been liquidated initially.
• To pay back one or more preferred creditors.

This commonly implies paying off suppliers and workers. However, it might also imply anything else. You could, for example, want to keep some of your assets while selling others to finance a recovery plan.

The Effect on Directors

The role and responsibilities of a company’s directors can change significantly during insolvency procedures. Understanding these changes is essential for directors to navigate this challenging period.

In a liquidation or administration, directors lose control over the company’s affairs, which is transferred to the appointed liquidator or administrator. Their main role during this process is to cooperate fully with the insolvency practitioner by providing all necessary information and assisting where required.

However, in the case of a pre-pack administration, directors may potentially be involved in buying back the business, subject to meeting certain requirements and regulations.

Directors should be aware of their legal duties to creditors when insolvency looms. Wrongful trading means that if directors continue to trade when they should have known there was no reasonable prospect of avoiding insolvency, they could be held personally liable for the company’s debts.

Moreover, directors’ conduct will be investigated during the liquidation or administration process. If they are found guilty of wrongful or fraudulent trading, they could face disqualification from acting as a director for up to 15 years, financial penalties, or in severe cases, criminal charges.

In a situation of insolvency, it is crucial for directors to seek advice from licensed Insolvency Practitioners as soon as they realise that their company may be unable to pay its debts. This can help to minimise potential liabilities and ensure they fulfil their legal obligations.

Liquidation or insolvency can have significant consequences for a company’s directors. Explore this topic further in our post on the truth about being held personally liable for company debts.

Administration vs Liquidation

The way a company’s directors choose to address and tackle a problem results in different outcomes, one being recovery and another closure. The sooner directors seek help and advice, the more likely an administration can be used instead of liquidation.

As a result, you should not put off seeking professional assistance and obtaining expert advice. Both procedures are caused by the same underlying issue: the firm is dealing with significant financial difficulties. The way an issue is approached and the actions taken as a result can lead to two very different outcomes: either a successful recovery, or a complete closure.

Why choose an Administration over a Liquidation?

The administration of a firm as part of UK insolvency law is one of the three main procedures involved in dealing with firms who are unable to pay their obligations.

Administration

Company administration is a structured insolvency procedure aimed at salvaging the viable portions of a struggling business, or alternatively, enhancing the repayments for unpaid creditors. As part of this process, an insolvency practitioner will be installed, who will then take over the company’s management whilst it is under administration.

Liquidation

Liquidation represents a procedure involving companies where a liquidator is tasked to conclude the company’s operations. When the process has been completed, the company effectively ceases to exist.

Creditors Voluntary Arrangement

The third type of insolvency procedure is a voluntary agreement called a Creditors Voluntary Arrangement (often known as a “reorganization”). A CVA is another option to Administration and Liquidation.

A CVA, unlike an administration, does not give control of the firm to an administrator. Instead, the business continues operating during the agreement period. A CVA needs 75 percent creditor approval, whereas an administration does not. The company goes into liquidation if the CVA fails.

The Legal Protection

A moratorium is placed on a company by an administration, which has the legal effect of protecting the company from creditors. This means that no creditor can take any action or start court proceedings.

As soon as a liquidation proposal is published in the Gazette, creditors must wait until the liquidator is appointed before taking any actions.

During this period, the administrators and directors have to decide how best to deal with issues facing the company. If the board does not act promptly, a creditor may be able to start or finish a legal action.

This can place additional stress on directors who face creditor pressure to make decisions about the company’s future. Directors may find it difficult to strike a balance between the competing interests of different stakeholders.

For example, a director might be trying to please some creditors while protecting others; however, this creates more uncertainty and makes the situation worse.

Time Span

Administration is a longer process than liquidation. An administration is only supposed to be used for a limited amount of time in order for the company to recuperate. An administration generally lasts around 12 months, but it may be prolonged. Liquidations are primarily a process to close a business and are therefore not time limited.

Costs and Fees

The financial implications of entering into either administration or liquidation are significant and should be carefully considered by company directors. Both procedures involve costs and fees, which are usually deducted from the assets of the company.

1. Liquidation Costs: In a liquidation process, the cost primarily consists of the liquidator’s fees. These are agreed upon at the creditors’ meeting at the beginning of the procedure. If the company’s assets are insufficient to cover these costs, the directors or shareholders may need to pay them personally. Liquidation also includes other expenses like legal costs, asset valuation fees, and costs associated with selling the company’s assets.
   
2. Administration Costs: Similar to liquidation, the primary cost in administration is the administrator’s fees. These fees are agreed upon by the creditors or approved by the court. The costs of administration can be higher than liquidation due to the potential complexity and length of the procedure. However, the aim of administration is to rescue the company, potentially making it a more financially viable option in the long term.

It’s worth noting that in both processes, the appointed insolvency practitioner is required to provide detailed and transparent information about their fees, allowing creditors to understand what they are being charged for.

Understanding the costs involved in these procedures is crucial. It is highly recommended for companies facing financial difficulties to seek advice from insolvency professionals. They can provide a detailed analysis of potential costs and help assess the most cost-effective solution.

Understanding the costs and fees involved in liquidation and insolvency processes is crucial. We provide a detailed breakdown of these expenses in our article on Insolvency Practitioners’ fees

What happens to Employees?

The administrators of a company in liquidation are permitted to make cuts under section 8(1)(a) of the Insolvency Act 1986 if they assume control. There are, however, certain restrictions on this practice. A business may not immediately terminate an employee’s contract without providing notice.

Depending on the type of contract an employee has, they could get up to 14 days’ notice before being laid off. If a company is sold out of Administration, the administrators can decide whether or not to keep the employees.

In Administration, staff can be laid off immediately; however, the administrator has the option to keep them employed for a total of 14 days before having to hire them again. This is not always the case when businesses are acquired out of liquidation since the employees remain the buyer’s responsibility.

Can Administration lead to Liquidation?

Companies enter into administration to save the company as a whole or in part, either because there are valuable assets that could be sold off or because shareholders want to see management changes. This is usually viewed positively by other companies.

However, it may sometimes become obvious after having begun the procedure that it is not feasible. A “no deal scenario” occurs when this happens. The firm may then require liquidation if this happens.

Sometimes the company is placed into administrative receivership before being liquidated to try and improve the position of creditors, which is done under section 135 of the Insolvency Act 1986.

Get in touch with us today.

At Company Doctor, we specialize in providing solutions to insolvent companies. Our team of licensed insolvency practitioners has extensive experience in helping companies navigate each process, from assessing their financial situation to negotiating payment arrangements with creditors. We understand the challenges faced by company directors during insolvency and are committed to providing the best possible advice and support.

Get in touch today on 0800 169 1536 for a no-obligation informal chat with one of our team for help and advice.

The Government has a page relating to liquidations HERE

References

The primary sources for this article are listed below.

https://www.gov.uk/liquidate-your-company

Insolvency Act 1986 (legislation.gov.uk)

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