The difference between liquidation and administration
While liquidation and administration are both formal insolvency procedures, they are in fact very different processes which ultimately look to achieve very different outcomes. In simple terms, liquidation brings about the end of a company by selling – or liquidating – its assets before dissolving it entirely. Administration on the other hand, is typically utilised when there is a chance of saving a business which is currently experiencing high levels of financial or operational distress. Let’s explore this further.
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Understanding the two types of liquidation
Liquidation is employed when a company is beyond rescue, or when its directors no longer want to continue running the company for any number of reasons. There are in fact two different types of liquidation depending on the financial position of the company in question.
Solvent v Insolvent Liquidations
If a company is profitable and has reserves of cash or assets – that is, it is solvent – but it is no longer needed, perhaps due to retirement, or if the director is moving on to a new venture, then the company can be closed down by way of a Members’ Voluntary Liquidation (MVL). This allows for the company’s assets to be distributed to shareholders in a time-efficient and cost-effective manner before winding down the company for good. MVLs must be undertaken by a licensed insolvency practitioner, and due to the professional costs involved, they are typically only suitable for those companies with in excess of £25,000 to distribute.
Liquidating an insolvent company
In many instances, however, a director will want to see their company liquidated due to falling sales and rising debts. Once a company is unable to meet its outgoings as and when they fall due, or if its liabilities outweigh its assets, it is classed as technically insolvent. The liquidation of an insolvent company is achieved through a process known as a Creditors’ Voluntary Liquidation – or CVL.
As part of the process, a licensed insolvency practitioner is appointed who will identify the company’s assets before selling these for the benefit of any outstanding creditors. The company will then be brought to a close in an orderly manner. Any debts remaining at this point will be written off – unless the director has provided a personal guarantee – and the company will cease to exist.
How is company administration different?
Where liquidation signals the ultimate end of a company, administration on the other hand is often focussed on saving the business through a process of restructuring. Once a company is placed into administration, the appointed administrator takes control of the company and it is immediately granted a moratorium – a powerful ring-fence that halts any legal action being taken.
This gives the administrator time and space to assess the company and devise a strategy to rescue the business should this be possible. This may involve a process of streamlining such as closing down non-performing areas of the business or unprofitable retail stores, or else by restructuring its debts to make them more affordable.
There are times, however, when a company enters administration with the aim of commencing a turnaround yet this proves not to be possible. In this instance the company will exit administration and immediately enter liquidation – typically through a CVL.
Liquidation or administration: which is right for your business?
If your company is experiencing financial difficulties and you are unsure what your next step should be, you are strongly advised to seek the assistance of a licensed insolvency practitioner. At UK Liquidators we have over 70 fully licensed insolvency practitioners located across the length and breadth of the country, ready to provide you with the help and guidance that you need at this time.
We will take the time to understand your company and the problems it is currently facing. With this information we can advise you on your possible options and be with you every step of the way no matter what you decide. Call our expert advisers today to arrange a free no-obligation consultation with a licensed insolvency practitioner in your area.