Closing a business is never an easy decision and it’s usually one that you’ve spent a lot of time considering before making a final decision. Usually, when dealing with an insolvent company, directors will make the decision to start the company closure using one of the formal insolvency procedures. Considering these options early is often one of the most important factors in getting a good outcome for everyone involved. Also importantly, it’s a director’s responsibility to ensure creditors’ positions are not made any worse. But liquidation isn’t the only way that a business can cease to operate, some businesses can be placed into administration. This blog is all about liquidation vs administration.
What is liquidation?
Liquidation is typically used by insolvent companies who cannot afford to pay back their creditors. You may be wondering ‘is my company insolvent?’ Essentially, if your liabilities are worth more than your assets, and you can’t pay your bills on time, then your business is likely insolvent. Before taking any action, you should contact a professional to assess the options available to you.
There are two formal insolvency processes that can be used. One is a compulsory liquidation whereby your creditors may threaten legal action through a winding up petition, ideally, this method will be avoided. The second method is a creditors voluntary liquidation which is also known as a voluntary liquidation, this is where the company’s directors place themselves into liquidation. This insolvency process involves appointing a licensed insolvency practitioner to formally close the company.
Before you choose an insolvency practitioner, you will need to ensure that you get all of the relevant information such as costs and additional costs in writing and make sure that you check things like overdrawn directors’ loans, misfeasance claims, and preference payments. This means that providing that you have acted responsibly, you will understand all costs upfront with no nasty surprises down the line.
You can place the company into liquidation within a few weeks. As soon as an insolvency practitioner has been appointed, your responsibilities as a director are over and they take over and start the liquidation process. Read our blog on whether liquidation affects a credit rating.
If you continue trading while your business may be deemed insolvent, then this may be labelled as wrongful trading. You should also avoid making payments to preferential creditors. If you are wondering if you have an insolvent company, you can contact us for free, confidential advice. Find out the differences between liquidation and bankruptcy.
What is administration?
Choosing to use the method of company administration means that as a director you may believe that there is a chance to rescue the business. Administration involves appointing an insolvency practitioner who will aim to restructure the company. This can include financial deals or looking at the employee structure. This means that some employees may face redundancy. Before you appoint an administrator and your company enters administration, you need to discuss all factors with them relating to your company’s affairs. This will allow them to assess your circumstances in an orderly manner and get you the best outcome. An administration is not suitable for many companies so please take advice as early as you can.
As soon as you have appointed an administrator, they will have approximately 8 weeks to outline their administrator’s proposals, which should outline the recovery plan. Using administration as a formal insolvency process can really help businesses to get back on track. Not only does it help the business in question, but it also offers a more favourable result for the company creditors. The company administration process may lead to creditors receiving more of the money they are owed through the financial restructuring.
When using company administration, your business will be given a moratorium which gives the administrator or licensed insolvency practitioner some breathing space and time to assess the current business situation and make plans for potential business rescue. During this time, if the practitioner finds that your business can not be rescued, you will be entered into a liquidation process that is suitable for your circumstances.
Company administration can generally last as long as you need it to. Usually, it can be any time between 6 months and 12 months, however this can be extended if necessary. If this date is extended, the administrator will be required to provide regular progress reports to prove that the business is on track. One of the most important advantages to using company administration is that creditors cannot apply for your business to enter a compulsory liquidation during this time. Read our blog on the pros and cons of administration.
What is the difference: Liquidation vs Administration?
One of the main differences between liquidation and administration is that liquidation is generally used by businesses that have no real hope of reviving their business. In contrast, those using the administration process are struggling with cash flow issues however there is a possibility that the business can be rescued through multiple changes. Businesses in liquidation or administration are likely struggling due to creditor pressure and other company debt. Administration is typically used by companies wanting to avoid liquidation.
Company directors that are considering closing their business or attempting to revive it should consider their options in detail but quickly. This will avoid further issues and will mean that you have adhered to your director’s responsibilities by requesting support fast. We offer expert advice and immediate support on liquidation and administration for businesses. You can also find out more about company voluntary arrangements.
Pre pack administration
Another option to consider is a pre pack administration. This insolvency procedure involves selling company assets to a newco in an attempt to gather some money to pay back creditors and keep the business going, albeit in a different guise. To ensure that this is done properly, you must prove that you sold assets for what they are worth rather than underselling them. This is very important and could land you in trouble if you are found to have undersold assets.
When suffering from financial pressure, you’ll want to do all that you can to escape insolvency and continue trading, but you must act within your director responsibilities and complete actions legally.
Whether you’re deciding whether to enter a liquidation or administration, we can offer a free consultation with a member of our team today to outline the two processes and find a suitable outcome for you. Speaking to our experts will give you confidential advice and full control over the situation.
Liquidation vs Administration FAQs
What are the main reasons for choosing liquidation?
There are many reasons why a director may choose to liquidate a company. It doesn’t just need to be due to financial difficulties. Here are some common reasons for liquidating.
- Struggling financially
- Deciding to start a new venture
- Retiring
Whatever your reason for liquidating, we’re here to support you. We work closely with directors to ensure that we achieve the best possible outcome for you.
What happens to employees in liquidation and administration?
A liquidation means that employees are made redundant. Most employees can access redundancy pay in this scenario. Employee redundancy is one of the downsides of liquidation, but you have to act in the best interest of your creditors.
Even though administration doesn’t always result in company closure, it could still mean that employees are made redundant. If this happens, employees are still entitled to the same payments. However, administration can also be an opportunity to restructure the company, which means employees could remain a part of it. Seek professional advice about employee redundancy.
Does a company go into administration before liquidation?
Not every company decides to enter administration before liquidating, but some might. The administration gives the company time to restructure, but it doesn’t always work. Therefore, it may still result in liquidation.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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