Administration vs Liquidation: what’s the difference?
In your everyday usage, you may find that the terms “administration” and “liquidation” are used interchangeably. However, these terms mean two very different things in a business environment.
Indeed, both administrations and liquidations are types of insolvency practices which manifest in distinctive ways in terms of objective and application. When a business becomes insolvent, it cannot provide the financial backing to meet its contractual arrangements or pay off its debts, should there be any. What happens next to remedy the situation can either be through an administration or liquidation, depending on the unique condition of the company in question.
In the case of an administration, the end goal is business recovery and avoid insolvency. If, however, that cannot be achieved, then the company will go into liquidation; when this happens, the assets of the company are valued before ultimately shutting down.
Of course, there are many more technicalities involved in the processes which can have nuanced results for declining businesses; below, we take a closer look at the differences between administrations and liquidations.
In the event of an administration, the owner of the company hands over his legal ownership to an appointed insolvency practitioner, known as an “administrator”.
At this point, the company may be facing severe cashflow issues, making it unable to meet its trading obligation. As a result of this mounting pressure, directors assign administrators in the hope that they will eventually turnaround the business and make it profitable once more. If a company is placed into administration, any legal action against it will be stopped to give the business ample time to put into effect a recovery plan.
An administrator has three options: restructure the business and reach an agreement with indebted creditors to mend the company’s reputation, pay the creditors by realising the company’s assets, or sell the business to new owners as a going concern to yield greater returns than if the company was liquidated.
Administrations have a number of benefits, in that a firm can continue its trading operations with the same suppliers and customers, carry out its contractual obligations to prolong the company’s lifespan, and also save the jobs of all its staff members. Whatever the result of the administration is, however, the final decision must be agreed to by the creditors, for their involvement in the situation, after all, is paramount.
In a nutshell, an administration can bring positive results to a business that previously saw no future. The turnaround may of course be slow, and suppliers may ask for payment upfront or cash on delivery, but operations can at least continue until the debt issues are resolved.
If, unfortunately, an administration is unsuccessful, a company will go into liquidation. This is the legal ending of a limited company that will prevent it from carrying out any more business, and thereby, require it to cease its trading operations.
There are three types of liquidation, depending on the financial solvency of the company. Both solvent and insolvent businesses can enter liquidation, but the processes vary between the two.
- A Members’ Voluntary Liquidation. This type of liquidation is for solvent firms, particularly for directors who have willingly decided to shut down the business and stop trading, perhaps as a result of retirement, or the inability to find a replacement to continue running the business.
- Creditors’ Voluntary Liquidation. This is for insolvent businesses, and chosen by directors to shut down operations and sell its assets.
- Compulsory Liquidation. This type of liquidation is also for insolvent businesses but is forced by the decision-making creditors to terminate the company in question.
In all instances, there is no option for the company to consider a recovery, and a liquidation will see the business “struck off” the Companies House register so it no longer legally exists. The main purpose is to close the company and realise its assets to maximise the repayment to the creditors and shareholders, for they are the primary concern in a business.
A liquidator’s job is to oversee the process of liquidating the company, and will ensure that a company’s contracts, including employment contracts, are fully completed or transferred accordingly. Following this, business transactions and operations will be shut down and legal matters will be resolved in due course. The liquidator will then sell the assets and collect debts owed to the company, before finally paying the creditors and sharing any of the remaining capital with shareholders.
Which is better?
It is clear that although administrations and liquidations are inherently two very different procedures, they are both practices that are a response to a failing company so as to best resolve the situation by limiting the damage to the company itself and the involved creditors. Both have their respective uses and the most appropriate practice is one that tailors to the firm’s specific condition and produces the best financial result.
Entering administration may be the more “hopeful” route as it prospects profitability and a turnaround, but a liquidation may be the more viable and realistic solution to a suffering business, offering the most benefits in terms of limiting losses and repaying creditors as best as possible.
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