When a business faces financial difficulties, there are two insolvency practices which are the most commonly used, and they are often confused. Administration and liquidation are both governed by the Insolvency Act but are very different processes, and each has its own set of criteria for when they should be applied. These two processes are often incorrectly considered to be the same same process, which leads to further confusion. 

In this article, we will explain each process, looking at how they work and highlight the key differences between administration vs liquidation. 

What is administration? 

This is when an Insolvency Practitioner is appointed to manage the business affairs and any property to prevent the company from going into immediate liquidation. This can help achieve better outcomes for the creditors. 

The administration process is often used for companies with assets of a high value because the procedure allows for sales of these assets to be completed quickly and can include business sales proceeds, which are often not included, or are lower, in other processes. 

How does the administration process work?

When a business is placed into administration, the IP needs to file paperwork at court which confirms that the business is insolvent. The court will then need to be satisfied that the administration meets one of the three statutory purposes of administration. They are: 

• Rescue the company as a going concern or
• Achieve a better result for unsecured creditors than if the company were put into liquidation (wound up) or
• Realise property to enable a distribution to one or more preferential or secured creditors.

Once granted, an administrator can be appointed to take control of the company, assess its financial situation and develop a plan to rescue the business, if viable, or begin the process of realising its assets to repay creditors. 

If a sale of the business is being proposed, the Director and the Administrator must consult with creditors with their proposals at the earliest opportunity and if the proposed sale is to be to a connected party, an independent pool of pre pack sale specialists must evaluate and advise on the proposed sale on behalf of the creditors. 

Any sales completed, either as a going concern, a business sale or a break up sale are intended to be actioned quickly in order to achieve a rescue or a better return for creditors and if this cannot be achieved, often the alternative process (Liquidation) is pursued instead.

What is liquidation? 

Liquidation is the process of winding up the business. It involves selling assets to pay creditors; it can be voluntary (initiated by the business or shareholders) or compulsory (ordered by the court following a creditor petition). Like administration, liquidation occurs when a business has become insolvent and is unable to meet its financial obligations, such as paying creditors, suppliers and employees, but it involves lower returns to creditors and is not driven by the court. 

How does the liquidation process work?

The liquidation process involves winding up a business’s affairs, including selling its assets to help pay off creditors before dissolving the company. The liquidation process begins with the appointment of a liquidator. The liquidator’s role is to manage the process, sell assets, and pay creditors in a specific order of priority.

The business is dissolved once either all debts are settled and 3 months has passed from when a final account is filed at Companies House; or, as is more commonly the case, where all Liquidation estate funds have been distributed, to settle as many creditors as funds allow, then a final account if filed and 3 months have passed.  This is the same as in Administration but Administration does not allow for unsecured creditors to be paid so typically a case which goes into Administration initially (because it can guarantee a rescue or better returns) then goes into Liquidation after, in order to distribute the final sums to creditors.

Administration vs liquidation: The key differences 

When it comes to administration vs liquidation, the key differences are: 

Objective and outcome

• Administration aims to rescue the business, restructure debts or achieve a better outcome for creditors. The business may continue to operate if successfully restructured and viable. 
• Liquidation focuses on winding up the company, selling assets to pay creditors and dissolving the business quickly. The company can no longer trade.

Process

• Administration involves an administrator taking control to manage and restructure the company.
• Liquidation involves a liquidator being appointed to sell assets and distribute proceeds to creditors.

Creditor involvement 

• During administration, creditors may be involved in approving the administrator’s plans. 
• During liquidation, creditors are not consulted about the plans.  

Administration vs liquidation: Which does your business need?

The insolvency process that is best suited to your business will entirely depend on your financial situation. If there is a chance that your business could be rescued with the correct input, then administration would be the best course of action. 

If your financial situation means you can no longer meet your financial obligations, and there is little hope of rectifying this, your business would most likely be liquidated. 

The earlier you seek professional advice from an insolvency practitioner, the better the chance you have of recovering your business and avoiding liquidation.

Why choose Bridge Newland?

As a family-owned and fully licensed Insolvency Practitioner, Bridge Newland is committed to upholding the highest professional standards. Our team, comprised of highly skilled and experienced professionals, operates in strict accordance with the latest insolvency and restructuring legislation and best practices. We are dedicated to providing you with insolvency advice you can trust. 

Our experienced team of insolvency practitioners can advise you at every stage of the insolvency and restructuring process. Speak to our expert Insolvency Practitioners today for a free initial and confidential consultation.

Categorised in: Administration News, Insolvency Reviews & Advice