Both company administration and liquidation are unsettling and troubling times for any business. They are both formal insolvency processes and often get confused as the same, but they are in fact different.
It’s okay to be confused, which is why if you run a company going into administration or liquidation, or simply want to understand the key differences between the two insolvency processes, this guide will explain all.
What Is Company Administration?
A business going into administration means handing control over to a licensed insolvency practitioner who creates an action plan in an attempt to rescue the business from full closure when outstanding debts can’t be paid. The licensed insolvency practitioner can implement restructures, redundancies and other means to free up capital to pay off debts and get the company in a better position than it was previously.
What Is Liquidation?
Business liquidation is the process of closing a company by selling its assets to pay off debts. It is a terminal procedure, meaning the business stops trading and ultimately ceases to exist as a legal entity. Once liquidation is complete, the company is permanently dissolved.
There are several ways to carry out liquidation:
Business liquidation is the process of closing a company by selling its assets to pay off debts. It is a terminal procedure, meaning the business stops trading and ultimately ceases to exist as a legal entity. Once liquidation is complete, the company is permanently dissolved.
There are several ways to carry out liquidation:
- Creditors’ Voluntary Liquidation (CVL) – Initiated by directors of an insolvent company that can’t pay its debts.
- Compulsory Liquidation – Forced by a court order, usually after the company can’t pay its debts of £750 or more.
- Members’ Voluntary Liquidation (MVL) – Used when a solvent company chooses to close, often for restructuring or retirement purposes.
The role of the licensed insolvency practitioner, also known as a liquidator, is to:
- Sell company assets
- Distribute funds to creditors
- Investigate the directors’ conduct
- Close the company permanently
The Core Differences Between Administration and Liquidation
Purpose
The purpose of company administration is to rescue a business rather than close it down when it is insolvent due to cashflow issues.
The purpose of company liquidation is to close a business, pay off all creditors and distribute any remaining assets and funds to shareholders. Unless it is a Members’ Voluntary Liquidation, the interests of the creditors are put first.
Trading
When a business has enacted the administration process, it can still trade and continue business as normal. This means the company has the time and resources to be rescued from total insolvency.
During liquidation, a business can’t continue to trade. Also known as winding up a company, instead of trading, the business must sell assets, pay debts and be removed from the Companies House Register. Directors of a company could face legal action if they continue to trade while their business is in liquidation.
Control
A company going into administration must hand control over to a licensed insolvency practitioner. They will handle everything from day-to-day admin to putting steps in place to pay off debts to creditors. The directors of a company will no longer have any power during the administration procedure.
During liquidation, the appointed licensed practitioner will also take control of the company’s affairs. They will make decisions on investigating director conduct, selling off assets and paying creditors.
Creditor Protection
When entering administration, a business benefits from statutory moratorium (breathing space), which prevents creditors from enforcing debt collection or any type of legal action.
However, with business liquidation, the creditors’ best interests are put at the centre by the appointed liquidator, meaning the company is legally obliged to pay off all debts.
Outcome
With the purpose of company administration being to rescue a business, the outcome can go several ways. Positively, debts are paid off, and the company continues to trade in a better financial position, or assets or the entire business are sold. Negatively, if the business can’t be saved, it will go into full liquidation.
Company liquidation always ends in the full closure of the business. Debts are paid to creditors, and if it is a CVL or MVL procedure, remaining funds will go to shareholders.
Director(s) Role
During the administration process, all directors hand over complete control to the appointed licensed insolvency practitioner and must cooperate with them throughout the entire process.
It is the same for liquidation, where directors hand over control of all assets and the business to the appointed liquidator. However, directors must also make sure that the company does not worsen the financial position of the creditors and treat all creditors with the same level of priority.
What Is The Impact on Directors?
Administration
When a company enters administration, directors lose day-to-day control of the business. Their appointed administrator takes over management responsibilities and makes decisions in the interests of creditors. Directors must fully cooperate with the administrator, providing company records, financial information and explanations of past decisions.
While control of the business shifts, business administration can offer a potential lifeline, and the business can be sold back to the directors through a pre-pack administration. This process can help preserve jobs, protect business value and allow operations to continue under a new structure.
Liquidation
In company liquidation, directors not only lose day-to-day control, but their powers formally cease altogether. A liquidator is appointed to wind up the company’s affairs, realise assets and distribute funds to creditors.
The liquidator is required to review the conduct of the directors leading up to insolvency. If wrongful trading or other misconduct is identified, directors may face personal liability, fines or disqualification.
When Is Administration More Appropriate?
It is recommended to choose company administration when:
- The business is viable but facing short-term financial pressure
- There is a realistic prospect of rescue or restructuring
- A sale of the business is possible
- Jobs and brand value could be preserved
- Creditor returns would likely be higher than in liquidation
- Directors want breathing space from creditor action, like wind-up petition
When Is Liquidation the Right Option?
Business liquidation should be chosen if:
- The company is insolvent with no realistic chance of recovery
- There is no viable business to sell or restructureLiabilities significantly outweigh assets
- Creditors are pressing for repayment, with no funding solution available
- Directors wish to close the company in an orderly and compliant way
- A formal investigation into company affairs is required
Unsure Which Option Suits Your Situation? Contact Our Experts Today
At Griffin & King, we are insolvency and administration experts and support companies across the UK a licensed insolvency practitioner. Both company administration and liquidation are stressful times, but we are here to help.
If you need expert advice on which process to take or need to appoint a licensed insolvency practitioner to handle proceedings, call us today on 01922 722 205 or find our contact details here.
