The Difference Between Administration and Liquidation
While they are both insolvency procedures, there are some very key differences between administration and liquidation.
Both solutions allow directors to uphold their legal duties to creditors – but their outcomes can be very different. Administration holds the potential to rescue a struggling company, while liquidation is certain to result in its closure.
In this guide, we’ll look at the pros and cons of each process, when they’re appropriate, and some alternative options.
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How Do I Know If My Company Is Insolvent?
Administration and liquidations can generally only be applied to insolvent companies. Most people have a vague understanding of what insolvency is, but how do you actually know if your company is insolvent or not?
A company is insolvent when either:
- It cannot pay its debts as they fall due
- Its liabilities are greater than its assets
Keeping track of whether or not your company is insolvent is highly important.
Your duties as a director fundamentally change, and you’ll need the assistance of a formal insolvency procedure – such as administration or liquidation – to meet your legal obligations.
Continuing to trade while insolvent can result in some nasty penalties. You could be charged with misfeasance or wrongful trading.
If found liable, you could be:
- made personally liable for company debts
- disqualified from acting as a director (for up to 15 years)
- hit with large court fines
In extreme cases, you could be found guilty of fraudulent trading – this could result in you being sent to prison for up to 10 years.
What Is Administration?
Administration is an insolvency procedure that is used to help businesses on the brink of closure. The company is placed into the hands of an administrator, who will look to achieve one of three statutory outcomes:
- Rescue the company as a going concern
- Achieve a better result for creditors than a liquidation
- Realise assets to make a return to secured or preferential creditors
Administration places a company into a ‘moratorium’ period; during this time, creditors can’t take legal action against the business, giving it a chance to get sorted out.
The administrator will always seek to save the business before defaulting to one of the other two options. Although it doesn’t offer any guarantees, administration can offer businesses a fighting chance at getting firmly back onto their feet.
What Is Liquidation?
A Creditors’ Voluntary Liquidation occurs when directors pledge to liquidate their insolvent company to help repay their debts to creditors.
A liquidator then takes control of the company and sells its assets. Once creditors have been repaid as much as possible, any remaining debts are written off.
As the most popular form of company closure in the UK, a CVL offers many benefits to directors:
- Relieves pressure from creditors in as little as 14 days
- Helps directors uphold their legal duties
- Safeguards directors from accusations of misfeasance, wrongful trading and fraudulent trading charges
- Fees usually covered by liquidation itself, saving personal cost
Liquidation guarantees a business’s closure, but it is often the better choice. Sometimes, a company is too far gone to consider a recovery procedure, which can end up just being a needless expense.
Liquidation allows you to uphold your duties to creditors in a pragmatic and cost-effective manner.
Administration Vs Liquidation: Which is Better for Your Business?
The answer to this question varies on a case-by-case basis, so providing a definite answer without proper insight isn’t possible.
However, there are general scenarios that each solution is better suited for.
Administration is often the better choice for a relatively stable firm that is experiencing a temporary dip in revenue or an unforeseen gap in its cash flow. Administration can return a still-viable company to solvency, saving directors from needlessly losing their hard-earned business.
That being said, liquidation is usually the better choice for most struggling companies. It puts a firm end to spiralling debt and allows directors to uphold their legal duties in an affordable way.
Remember, pursuing rescue procedures when a business is fundamentally unstable will likely result in an eventual liquidation anyway, creating unnecessary costs and worry.
Are There Any Alternatives to Administration and Liquidation?
Yes – there are a few other insolvency procedures available.
One is another business rescue procedure, serving as an alternative to administration.
The other is a solvent liquidation, available to solvent companies with cash and assets.
A Company Voluntary Arrangement is a business rescue procedure which allows companies to deal with their debts while avoiding liquidation.
It functions as a repayment plan, allowing companies with stable revenue to recover from insolvency:
- Stretches out repayments over 3-5 years
- Reduces monthly overheads
- Freezes interest on debts
- Offers protection from closure
Your company will need to make one singular payment to your insolvency practitioner per month. We’ll then split this up between your creditors on your behalf. As long as you keep up with these repayments, you’ll be protected from closure.
To enter into a CVA, you’ll need the backing of 75% of your creditors (by value). Our team can help you draft a proposal that is practical for you and attractive to creditors.
A Members’ Voluntary Liquidation is the best option for solvent businesses looking to close and return assets to shareholders.
- Most tax-efficient way of solvent company closure
- Returns subject to Capital Gains Tax, not Income Tax
- You may also be eligible for Business Asset Disposal Relief
An MVL must be carried out by an insolvency practitioner. Returns can be made within 6-12 months.
Speak to an Expert
If your business is struggling – and you need to decide between administration and liquidation – it’s crucial that you speak to an insolvency practitioner.
Rushing into an insolvency procedure without due consideration can result in paying avoidable costs or needlessly losing your business.
Our team can assess your situation and guide you to right solution, allowing you to move forward with confidence.
Get in touch today to book your free consultation.
