Administration vs Liquidation: What is the difference?

Although the terms are often used inter-changeably, administration and liquidation are in fact two very different types of formal insolvency procedure.

A number of factors such as the financial state of a business, its prospects for recovery, as well as the future intentions of its directors, will determine which procedure is the most appropriate for a company experiencing a period of financial distress.

In simple terms, administration is a mechanism utilised to bring about the rescue and recovery of a struggling company, whereas liquidation is a tool which used to close a company down for good.

Understanding Liquidation

Liquidation is termination process and signals the official end of a company. Liquidation is chosen when there is no likely possibility of the company managing to turn around its fortunes, or where there is no desire on the part of the directors to keep the business operating.

For insolvent companies, closure is achieved through a process known as a Creditors’ Voluntary Liquidation (CVL) which must be overseen by a licensed insolvency practitioner. As part of the process, the company’s assets will be sold – or liquidated – for the benefit of its outstanding creditors before the company is formally dissolved and removed from the register held at Companies House.

Understanding Administration

Administration, on the other hand, provides struggling – yet viable – companies with time, space, as well as legal protection to formulate a rescue plan where possible.

Once a company enters administration it is protected by what is known as a moratorium which acts as a legal ring-fence to prevent legal action being taken against the company by any its creditors. This allows the administrator – who must be a licensed insolvency practitioner – to explore the options available to the company free from the threat of litigation.

Following Administration

While administration is an extremely useful process, helping to save companies as well as jobs, it is not a position for a company to remain in permanently – sooner or later it will have to exit administration. Hopefully this will happen once the company has been adequately stabilised, allowing for business to resume as normal on more solid foundations thanks to the restructuring undertaken during the administration process.

In other instances, the company may exit administration and immediately enter another formal procedure such as a Company Voluntary Arrangement (CVA) which would allow for outstanding debts to be renegotiated with creditors depending on what is realistic and affordable. This would allow the company to continue trading and pay off its current debts using future profits.

However, in other circumstances it may unfortunately be the case that despite the best efforts of the administrator, it is decided that the company does not have a realistic chance of recovery. In this case, the company would then enter liquidation by way of a CVL.

Expert Advice on Company Administration

If you are considering administration for your limited company, call the team at UK Administrators to arrange a consultation with one of our licensed insolvency practitioners. We have been helping company directors for over 30 years, providing expert help and guidance during times of financial and operational company distress. We can talk you through the administration process and advise whether it is appropriate for your company. If not, we will help you understand what alternative options you may have. With over 100 UK Administrators offices across the country, you are never far from expert help and support.