Although they are both insolvency procedures, there are several key differences between liquidation and administration that you should be aware of.
Let’s firstly, determine what both processes actually entail:
Liquidation is the process of winding up a company’s affairs and selling off its assets in order to pay its debts. Once a company is in liquidation, it generally ceases to trade and is eventually removed from the Companies House register.
A licensed insolvency practitioner (IP) is appointed as the liquidator and is responsible for managing the process. They will realise the company’s assets, including any stock, property, or investments, and use the money raised to pay off its debts.
– All debts owed by the company are wiped out – If a company owes money to another business or individual, liquidation can be used as a way of having these debts written off. This can be helpful if the company is unlikely to be in a position to pay off its debts within a reasonable period of time.
– The company is removed from the Companies House register. This can be advantageous if the company has been trading while insolvent for a long period of time and directors wish to start afresh.
The liquidator on behalf of the creditors can take legal action against the directors to enhance the company’s assets to enable creditors to be repaid their debts, if it can be shown that the directors have done something wrong. This can result in the directors being made personally liable for the company’s debts.
– The company’s reputation may be harmed. The news that a company has entered liquidation can damage its reputation and the reputation of the directors if they wish to trade in the future.
Administration is a formal insolvency procedure that gives a company protection from its creditors while it attempts to restructure and/or pay off its debts.
An administrator, appointed by the court, creditors or the directors themselves, is responsible for managing the process and will work with the company to develop a strategy for moving forward. This may involve selling off some of the company’s assets, negotiating new terms with creditors, or even closing down the business altogether.
– The company is protected from its creditors. One of the main advantages of administration is that it gives the company a breathing space, allowing it time to restructure without the threat of creditors taking legal action or demanding payment.
– It may be possible to save the company. Unlike liquidation, which invariably results in the company ceasing to trade, administration gives the company a chance to continue trading and perhaps even turn things around.
– The administrator has wide-ranging powers. One of the main disadvantages of administration is that it hands a great deal of power from the directors over to the administrator. This can make it difficult for directors to maintain control over the company and its affairs.
– The company’s reputation may be harmed. As with liquidation, the news that a company has gone into administration can damage its reputation, making it difficult to trade in the future.
1. Liquidation always results in the company being wound up and removed from the Companies House register, whereas administration does not necessarily mean this will happen.
2. An administration is usually about achieving a better result for creditors than would otherwise be the case. Thus a company may enter liquidation to enable creditors to be paid their debts after that better result has been achieved by an administration process but a company can never enter administration after it has been in liquidation.
3. The liquidation process can be and is very often used to wind up the affairs of a company that is able to pay all its debts in full and then pay the surplus to the shareholders – this is called a solvent liquidation and are often utilised by business owners for tax reasons. An administration process is not used for this purpose.
4. The main aim of liquidation is to pay off the company’s debts, whereas the main aim of administration is to rescue the company and hopefully allow it to continue trading to enable a better result for all concerned. Liquidation is generally considered to be a last resort, whereas administration is often seen as a way to give the company a second chance.
5. Administrations by law usually only last 12/24 months whereas some liquidations (eg of insurance companies) can take very many years or even decades to complete, but most simple liquidations can be completed in a matter of weeks or months.
6. Creditors have more direct control over the liquidation process and the liquidator than they do over an administration process and an administrator partly because the administrator acts in many ways as a quasi officer of the court. Thus a liquidator can be removed by the creditors, but an administrator can generally only be removed by a court.
7. Once a company is in liquidation, its assets are sold off and the proceeds are used to pay its debts. Liquidation always results in the company ceasing to trade, whereas this does not necessarily happen in administrations. In administrations, the administrator may sell off some or all of the company’s assets but he can also negotiate new terms with creditors, continue to trade the business of the company and even return the business to the directors / shareholders. Administrations are thus more flexible and provide a greater range of eventual outcomes than liquidations.
8. Liquidators report to creditors annually whereas administrators report to creditors six monthly.
9. Administrators formulate for approval by creditors their proposals for implementing the strategy of the administration to achieve the better result for creditors. Liquidators do not do so – their strategy is always the same – realise the assets of the company to repay creditors and if there is a surplus left over, repay that surplus to the shareholders.
10. The costs of administration are generally proportionally higher than the costs of liquidation because of the complexity of the issues that the administrator often has to deal with – after all, he may be involved in running a business (and all that that entails) perhaps for some time.
The decision of whether to choose liquidation or administration for your business is a difficult one. There are a number of factors that you will need to take into account, such as the type of business you have, the amount of debt you are in, your reputation and the impact on your employees. You should seek professional advice before making a decision.
If you are considering liquidation, it is important to remember that this will result in the company being wound up and removed from the Companies House register. This can have a negative effect on your reputation and make it difficult for you to obtain credit in the future. You should also be aware that liquidators may be able to take action against you if they consider that you have done things in the past to harm the interests of creditors.
If you are considering administration, you should be aware that this is usually a more costly insolvency procedure than liquidation and can have a negative effect on the company’s reputation. However, administration may give the company a chance to restructure and continue trading.
Only a licensed insolvency practitioner can be appointed as a liquidator or an administrator. If you are considering either of these options, you should contact a licensed insolvency practitioner to discuss your options.
The bottom line is that each case is unique and there is no “one size fits all” answer to the question of whether liquidation or administration is the best option for your business. You should seek professional advice to help you make the best decision for you and your business.