Administration vs Liquidation – What’s the difference?

This guide seeks to answer the many questions that directors have when considering whether liquidation or administration might be the appropriate procedure for their insolvent company.

Chamberlain & Co have been established for over 20 years, both liquidations and administrations have been core service lines throughout. We aim to make the process as stress free as possible, whether this is a straight forward company closure or part of a larger restructuring strategy. We have a team of award winning dedicated professionals who specialise in insolvency, restructure, rescue and business turnaround. We are an established service provider within our sector and nationally.

What is a Liquidation?

A Liquidation is a procedure which is used to wind a company up. All assets are sold in return for money which is then distributed to creditors. The process is controlled by an appointed liquidator (who is a licenced Insolvency Practitioner) and the end result is the closure of the company, however a viable core business can be salvaged and restarted in a new company. 

What is an Administration?

An administration is another company insolvency procedure which gives legal protection to the company from its creditors whilst the appointed administrator (Insolvency Practitioner) has the opportunity to assess whether the company or business can be saved.  

An administration is not always an option, but when it is it can be used to turnaround and save the company. It provides an alternative pathway from liquidation when a company becomes insolvent. A company can exit administration by being passed back to its directors, alternatively it could restructure its debts and operations by means of a CVA and be handed back to its directors. 

If there is no longer any prospects of maximising the realisation of assets, the company can proceed into a liquidation. 

Statutory Requirements

Whereas there are no statutory requirements for liquidations, in order to enter into an administration there is an obligation to fulfil 3 statutory purposes:

1. To save the company
2. There will be better realisations than if it had gone into liquidation initially
3. To pay back one or more secured or preferential creditor(s).

Administration Vs Liquidation

Both Administrations and Liquidations are formal insolvency procedures which result from the same underlying problem- a company’s insolvency.

This is a word that no director wants to think about, but unfortunately sometimes the build-up of financial pressure can mean that they are forced to consider these procedures.

The earlier directors seek help and guidance, the more probable an administration can be used to rescue and recover the company. Therefore, it is essential that you do not delay and instead get the correct professional advice as early as possible.

Both procedures arise due to the same underlying problem, in that the company in question is facing significant financial difficulties. However, how the problem is approached and tackled leads to different final outcomes- one being a recovery and the other closure.

Why choose an Administration over a liquidation?

There are several reasons why an administration would be used over a liquidation:

• Administration would normally be the first choice procedure when it was considered likely that either the company or the business could be saved.
• To protect the financial position of the company in order to propose a CVA
• To give the company breathing space to allow a restructure. This again can allow the financial position to become much stronger, for instance if the insolvency was caused by lack of liquidity that can be restored by changing the financial structure.
• When the administration process allows the administrator more legal powers to continue to trade or otherwise keep the business intact to achieve better realisations than could be achieved in liquidation. 

The legal protection

Entering into an administration places a moratorium over the company. This then creates a legal cloak of protection such that no one creditor is able to take any precipitative action. This then allows the administrator and directors a short window of time to decide how best to resolve the issues being faced. 

In contrast, during the period between the liquidation being proposed and the liquidator being appointed there is the chance that a creditor could commence or complete a legal action against the company. This can create additional stress and worry for directors where they are being faced with a high level of creditor pressure.  

The time span of the processes

One of the main differences between an Administration and a liquidation is the length of time of the process.

An administration is only designed to be a time limited measure to allow the company to be rescued with protection from creditors. An Administration usually lasts up to 12 months- however, this can be extended.

A liquidation is predominately a process to close a company and is therefore not time limited. 

What happens to the employees?

Upon entering a CVL, the employees contracts will be terminated at the time of the company going into liquidation. 

In Administration employees can be made redundant immediately, however the administrator can choose to keep them employed by the company for a maximum for 14 days before having to adopt their contract of employment. 

If a business is bought out of a company in administration, it is deemed that a transfer of undertaking of employee rights has occurred and they become a liability of the purchaser. This is not necessarily the case  if a business is bought out of liquidation. 

Can an Administration lead to a liquidation?

An administration is typically entered into with the view to saving the company in whole or in part. However, sometimes after having entered the process, it becomes apparent that this is not feasible. In these circumstances, the company may need to proceed into liquidation.

Sometimes the company is placed into administration prior to being liquidated in an attempt to optimise the funds available to creditors. If it is more beneficial to go down this route, it is justifiable to protect the company in the short term to maximise the realisation of assets during the liquidation.

What are the roles and responsibilities of the directors?

In both processes, the directors have a responsibility to cooperate and assist the Insolvency Practitioner to the best of their ability. The powers of the directors in both are ceased and the administrator/liquidator will take full control of the company.

The difference here is that at the end of the liquidation, the directors will no longer have any power over the company (as the company will no longer be a going concern), whereas at the end of the administration, the directors can regain their power and take back control of the company.

Will I still be investigated, as a director, during an Administration?

In both Liquidations and Administrations, the actions of the directors will be reviewed. If directors continue to trade after they ought to have concluded that there was no real prospect of being able to settle the liabilities being incurred, then they could be personally liable for them under the wrongful trading provisions. Certain other transactions which should not have been undertaken can also be reversed to improve the position for creditors generally. 

If you are at all worried about whether you should continue trading, get in contact today for professional advice and guidance.

Summary 

We appreciate that this guide contains a lot of information to take in. The liquidation and administration options need to be considered alongside the other potential options for your company such as Moratorium, Restructuring plan process, Company Voluntary Arrangement (“CVA”), Compulsory liquidation/compulsory winding up, Strike off/dissolution or accelerated sale/merger. To be expertly guided through these different options for your own particular circumstances, email or call to have a free, no obligation consultation. 

Now that you have read the guide please feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk.