Both formal insolvency procedures, liquidation and administration, are proceedings that businesses can use to resolve their financial problems.
Often, these two terms are confused with each other; however, there are very clear differences, and it’s important for business owners to be clear in their understanding of these differences to decide on which one is best and most appropriate for them.
In this post, we look at the key differences between liquidation and administration and how business debt collectors are used throughout the process.
Liquidation vs administration
To answer the question “what is an administration?” – in its simplest form, it is a way to rescue and recover certain aspects of the business to help it eventually return to a profitable position.
Liquidation, on the other hand, is when the business can’t be saved, and its assets are sold to repay outstanding debts before closure.
Difference between administration and liquidation
Company administration
Company administration is a formal way of restructuring a company to enable it to continue operating, after which it may be returned to its former directors or sold as a going concern.
A licensed and experienced insolvency practitioner will be appointed to carry out the administration process, take control of the company, assess its financial position, and develop and share an action plan with all involved.
During the process, the insolvency practitioner will streamline the business, renegotiate contracts where appropriate, potentially look to make staff redundancies, and restructure debt using a company voluntary arrangement.
To enter into administration, the company must be able to meet three statutory purposes:
- Save the company
- There is a clear realisation about the financial state of the company
- One or more creditors will be repaid.
Note: During the administration process, the company will be protected from creditor legal action.
If the administration does not work, the company can be put into liquidation.
Advantages of administration
- The company could be saved
- Can offer legal protection
- You are protected from further action by creditors
- Restructuring can make the business attractive to potential buyers
- Can give the company much-needed breathing space
- Entering into administration can provide a better return for creditors.
Disadvantages of administration
- Directors must hand over control of the business
- It can damage your reputation
- It can be expensive to put in place and carry out
- Job losses may still be inevitable
- Directors could be investigated for the role they played in the company.
What is liquidation?
Liquidation occurs when a company’s debts become unmanageable and the business has no choice but to close.
Entering into liquidation means appointing a licensed insolvency practitioner to wind down the business. Any assets that the company holds will be sold, with the proceeds used to pay creditors; this will be based on who has the highest priority. Any remaining debts after this stage will then be written off, and the company will be removed from the Companies House register.
There are three types of liquidation:
Members’ voluntary liquidation – entered into when a company is solvent.
Creditors’ voluntary liquidation – for insolvent companies.
Compulsory liquidation – creditor actions force the company into liquidation.
When a company enters liquidation, its directors are not liable for any of its debts.
Advantages of liquidation
- It is a legal, formal, and organised way to dissolve a company
- Directors aren’t liable for debts
- Employees may be eligible for redundancy
- Liquidation limits creditor losses
- It efficiently ends the business
Disadvantages of liquidation
- Businesses can’t trade using the same name for 5 years
- Everyone will lose their jobs
- Unsecured creditors will lose outstanding debts owed to them
- Personal guaranteed debts must be repaid by directors
- The conduct of directors may be investigated.
Administration vs liquidation
The Insolvency Act governs both processes, with both processes trying to limit the damage to the company and its creditors. However, these procedures are very different as they aim to achieve different outcomes.
The administration process is more flexible and can help businesses with serious cash flow problems. However, liquidation is a viable option if a company can no longer repay its debts and there is no chance of recovery.
The process of administration also ends after a year, whereas liquidation can be completed in a few months.
However, to enter administration, a company must seek creditors’ approval, whereas liquidation does not require it. There is also no statutory requirement to enter into liquidation.
Liquidation means directors have no power over the company, whereas administration means directors can regain control after restructuring.
Liquidation can follow administration, with administration the first choice to attempt to optimise the funds that are available to creditors.
It is always advised that you seek professional financial advice and assistance to support you in making the right decision for your business.
Business debt collection agency
Insolvency is a warning sign that all is not well with a business; however, it doesn’t necessarily mean the end.
At Direct Route, we work with businesses of all shapes and sizes, helping with business debt collection to keep cash flow flowing and to avoid spiralling insolvency.
To find out more from a commercial collection agency you can trust, call us on +447860197476.