The difference between liquidation and administration

Liquidation v Administration: Understand the differences

While liquidation and administration are both formal insolvency procedures, they are in fact very different processes which often seek to achieve very different outcomes.

In simple terms, liquidation is a terminal procedure which 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. While administration can be used as a pre-cursor to liquidation, it is often used as a tool for the rescue and recovery of a distressed company.

Liquidating an insolvent company

When a company becomes insolvent, its directors must take action to shield creditors from suffering any further losses. If the company's financial difficulties have taken it beyond the point of rescue, perhaps due falling sales, rising debts, and a challenging trading environment, liquidation may be the only possible route forward.

The liquidation of an insolvent company is achieved through a process known as a Creditors’ Voluntary Liquidation – or CVL.

As part of the liquidation 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 and its affairs wound down in an orderly manner. Any debts remaining at this point will be written off – unless the director previously provided a personal guarantee to secure the borrowing.

How does company administration differ from liquidation?

Where liquidation signals the ultimate end of a company, administration on the other hand is often focussed on saving the business by restructuring its operations and/or finances.

While insolvency is a huge warning sign that all is not well with a company, it does not necessarily mean that it is the end of the road for the business in question. If the company has a viable future, despite its current financial difficulties, administration can be used to effect a successful turnaround.

Once a company is placed into administration, the appointed administrator immediately assumes control of the company. A moratorium is also placed around the company which acts as a powerful ring-fence that halts any legal action being started or continued against the insolvent company.

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 to save money, or else by restructuring its debts to immediately free up cash flow. 

There are times, however, when a company will enter into administration even though liquidation is inevitable. This may be done if being in administration can help to preserve the value of the company and its assets prior to them being liquidated. In this instance the company will exit administration and immediately enter into 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 should make it a priority 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 - which could include liquidation or administration -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.