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.
AdministrationIn the event of an administration, the owner of the company hands over his legal ownership to an appointed insolvency practitioner, known as an “administrator”.
LiquidationIf, 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.
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.
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