Liquidation and Administration – Are They the Same Thing?

When researching liquidation and administration and what they mean online, the terms are often used interchangeably, but in fact, they are far from identical.

We’re trying to clear up directors’ insolvency confusion, and this is one that we come across often.

Unless you work within the insolvency world, or have been through either process yourself, it is unlikely that you will know the differences.

You shouldn’t worry about this though, because you are not alone!

Of course, the press doesn’t help with this. Many reporters are required to speculate about well-known companies, without actually feeling obliged to know the meanings behind the terms that they are using, let alone explaining them.

So, what are the similarities between liquidation and administration?

• Both liquidation and administration are designed to deal with insolvent limited companies
• Both are conducted by licenced Insolvency Practitioners (IPs)
• Both provide protection against company creditors and legally freeze their action
• If immediate action is taken by directors, both minimise the possibility of legal action taken against the directors personally

We believe it is first important to understand these similarities to explain the fact that so many use these two terms as one and the same. Having said all of the above, it is obviously important to now understand the vast differences between the two processes.

What are the differences between liquidation and administration?

The most important difference for directors to understand is the purpose of the two processes.

Administration is used to essentially give companies some breathing space while they restructure or re-evaluate their situation. Thus, it can be used to turn a company around and back into solvency, in cases where the business is still viable.

The liquidation process, however, is designed to close a company formally and completely.

The main source of confusion between the two terms is probably the fact that in some cases, a mixture of the both processes is used.

This is far more common with larger corporations, which control several sub companies. This should again explain the confused terms used in reports concerning large high street firms; in practice, usually either one or the other process is utilised.

Administrator vs liquidator vs insolvency practitioner (IP)

These terms can be another source of confusion where informal articles are concerned. Common sense will tell you that an administrator oversees administrations, and a liquidator carries out liquidations.

The confusion arises when either of these terms are used interchangeably with the term Insolvency Practitioner. The main point to understand here is that both administrators and liquidators must be licenced Insolvency Practitioners (IPs).

So, anyone who is licenced to carry out such matters may act as both administrator and liquidator to different companies (or of course, the same company). It is true, however, that most IPs tend to carry out one particular process more than others.

Administration

• A temporary state designed to allow time for a rescue strategy to be drawn up
• This protects from the further deterioration of company finances
• An umbrella term used for a company state in which matters are frozen – for example, if the company is to enter a Company Voluntary Arrangement (CVA), a period of administration is required first to allow negotiations.

Usually, administration is used initially to place the company into a sort of bubble which protects them from creditors – any action against the company is automatically halted.

This gives administrators time to devise a strategy to turn the business around, by paying creditors and usually restructuring before continuing into profitability.

The administrator usually spends a period of time compiling the information about various company creditors and establishing their claims. From this, they are then able to assess the company books in detail and develop a plan to move forward.

Although the aim of this tool is to save the company, the administrator (insolvency practitioner) is required to act in the interests of the company creditors. Of course, by turning the business around, unsecured creditors will be in a far stronger position.

Usually, the administrator has 12 months to establish how the company will move forward, although it is possible for this period to be extended with the permission of the creditors and/or courts.

The reason that it is rare for Forbes Burton to advise administration proceedings for our clients is that we prefer to assess the situation before appointing an insolvency practitioner (whose fees tend to be significantly higher than other business consultants).

This way, our clients can avoid wasting money on extending the period of time that the insolvency practitioner needs to be instructed without any benefit.

Unfortunately, we have found that CVAs (Company Voluntary Arrangements, mentioned above) tend to be unsuccessful due to the fact that the business dealings were flawed in the first place.

Liquidation

• A permanent solution resulting in absolute company closure
• It is, however, possible for the business to continue under a separate legal entity
• Company debts will be paid as far as possible
• This is achieved by liquidating assets into cash and distributing this amount proportionally amongst company creditors

Liquidations are used by directors of insolvent companies that are simply not viable and need to close permanently.

By taking immediate action, directors are able to protect themselves from being accused of wrongful trading and thus risking personal prosecution and liability for the company matters.

When liquidation is used, the directors and staff of the company in question are able to claim redundancies through the RPO (redundancy payments office).

Of course, a liquidation could follow a period of administration, in cases where the insolvency practitioner (IP) does not see a way forward for the company.

The IP will first contact all company creditors, shareholders and other interested parties, seek an independent valuation of company assets, and oversee a distribution of the proceeds to creditors on a pro-rata basis.

Although the company will be no more after going through a liquidation process, the business doesn’t necessarily need to disappear.

In some cases, the directors are able to purchase the assets of the company and continue trading under a separate entity. If this sounds interesting to you, have a look at our limited company restarts.

Another way in which a liquidation could be initiated is through a winding up petition, which is issued by a creditor who is owed money by the company.

The process is essentially the same as a liquidation in this case, although it will be conducted by the Official Receiver (appointed by the crown), and a full and thorough investigation would be conducted into whether or not wrongful or fraudulent trading (also called misfeasance) has occurred.

Administration vs liquidation – which is right for me?

If your company has unfortunately become insolvent, this is never going to be an easy situation to overcome. A lot of directors first contact us during a period of high stress and worry, but it doesn’t need to be this way.

The first phone call is all that is needed to initiate the process of facing up to the problems ahead – in reality, the vast majority of problems can be dealt with for you, as long as it has not been left too late.

Your main priority should be pro-activity when your company is facing difficult times.

The answer to the above question will of course depend on the factors discussed above. The primary questions to ask yourself are;

• Do I see a way forward with my business?
• Have I sought independent advice regarding my plans?
• Would a re-start be more appropriate in my situation?
• Would a redundancy claim help my personal circumstances?
• Are there other processes that I should be looking into?

Need to talk to someone?

If you’re unsure of the difference between liquidation and administration and would like to know which is suitable for you, just give us a call now on 0800 975 0380.

We would be happy to talk through your options with you and offer independent, expert advice with absolutely no obligation.

You can find out more about how we can help you with a liquidation.