Written ByKeith Steven
Managing Director
Keith is the Managing Director of KSA Group Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
Administration and Liquidation are both insolvency processes for limited companies who meet the insolvent criteria. Both are governed by the 1986 Insolvency Act. This being said, the processes are very different and each only applicable in certain circumstances. The two are often confused – This page outlines the two processes by explaining their definition as well as exploring some of the main differences between them.
Administration involves appointing a licensed insolvency practitioner to a company as it becomes insolvent and can no longer pay its debts. Administrators take over and run the company, taking necessary action to repay creditors. A restructuring and recovery plan is made and implemented and a moratorium is put around the company, whereby they are protected from any legal action during this period. The administrator assesses the companies’ viability.
The process is temporary and not long term – it runs for typically a year, unless courts and creditors allow this to be extended.
Administrators must adhere to the following statutory purposes for their role: So the aims of administration are the following;
After 14 days of entering administration, employment contracts of the company are taken on by the administrators. Hence, it is favourable for the company to be sold out of administration before this date. If it can’t be sold then usually the company ceases trading and enters liquidation.
Overall, the idea of administration is to try and prevent the company from having to enter liquidation in the first place. It tries to turnaround and rescue a company. However, administrators are duty bound to always act in the best interest of the creditors.
Liquidation is the process of selling off or realising company assets in return for funds, from which pay the creditors. Usually this happens after the company has stopped trading. An insolvency practitioner works with the directors to do this. The end stage of liquidation is formal dissolution and removing the company from the register at Companies House.
Liquidation can occur after administration, if it failed to work, as the company will be left with no other choice than to close.
There are two types of liquidation: creditors voluntary and compulsory; one being instigated from creditors needing debts paid off and the other being instigated by the court following winding up petitions from creditors.
Most importantly, administration is an insolvency procedure which aims to rescue the company, whereas a liquidation almost always results in the end of the company.
Another difference is that administration can occur when the business has cash flow problems, but the business is viable and may need the protection of the creditors, whereas liquidations occur when the company is no longer viable and becomes insolvent (except in the case of a MVL).
During the time of which a liquidation is proposed and a liquidator appointed, a creditor could begin or complete legal action against the company. This contrasts to when a company enters administration and a moratorium period gives protection over any legal action from creditors.
Liquidation is usually the best solution if the business, in its current form, cannot continue to trade without allowing the company’s creditors position to get worse and there is a risk of wrongful trading for the directors. Usually the business ceases trading and the company is wound up by the liquidators. There is no ongoing “business” unlike in an administration (see below). After the appointment of liquidators by the creditors the company assets are converted into cash, the business ceases trading, all employees and directors are made redundant, creditors debts are agreed and eventually the company is dissolved. Liquidation is also a more straight forward process and is more cost effective for smaller businesses.
Administration, on the other hand, is appropriate where there is a heavily indebted and insolvent but fundamentally sound business that could be saved by a radical restructure, refinance, reduction of debts, sale of assets and a legal mechanism to stop creditors taking action. A good example of this may be where a customer or customers owe the company a substantial sum of money, but at the same time creditors are losing patience and are taking aggressive action in the form of threatening a winding up petition. See our case study where we helped with exactly this scenario.
Administration is quite costly in that insolvency practitioners need to oversee the trading of the company, insolvency agents and lawyers are involved as well. So, it is usually more appropriate for larger businesses with large debts and perhaps complex issues. Another situation where administration is appropriate is where there is a lot of value in a “brand” this is because the brand and goodwill of the BUSINESS can often be sold to help pay creditors and the brand can continue to “live on” in another company. This is often the case with household names and more consumer facing companies. You may even be able to buy the business and its brand in a pre pack administration but this is much more difficult these days for regulatory and legal reasons.
In liquidation you cannot start a new company with the same name without leave of the court or permission of the liquidator so it is not as straight forward. Remember an Insolvency Practitioner will not be prepared to be appointed to do an administration, unless he/she can show it will be a better result for creditors than a liquidation. This is a legal requirement. The usual “better result” comes from continuation of the business after administration, whereas there is no continuation of value post liquidation.
A company voluntary arrangement may allow you to continue to trade and remain in control of the company! It is also considerably cheaper than Administration. See this page for details of CVA vs Administration
With restructuring, cost reduction and a change in the way management runs the business, a CVA can help reduce and remove debt and focus you on running a successful business.