Differences between Liquidation and Administration

Differences between Liquidation and Administration. Author: John A Waller. reviewed June 24th, 2024.

Liquidation is winding up a company’s affairs by selling off its assets to pay its debts before closing it down permanently. Liquidation of a Limited Company is applied when a company is forced to close down and beyond rescue, or its directors no longer want to run it for many reasons. Depending on the company’s financial position, there are two types of liquidation.

administration is a legal process often initiated when there is a chance of rescuing a financially or operationally distressed business. In administration, a licensed insolvency practitioner(IP) takes control of the company to restructure it and save it from insolvency.

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Solvent -v- Insolvent Liquidations

Suppose a company is profitable and has reserves of cash or assets. In that case, it is solvent; however, it is no longer required, perhaps due to retirement or the director opting to start a new business. A tax-efficient way to close a solvent company is through a Members’ Voluntary Liquidation (MVL). Permits the realisation of the company’s assets to be distributed to shareholders promptly and cost-effectively before winding down the company. MVLs require the appointment of an IP. Directors must note that professional costs associated with an MVL suggest their suitability applies to companies with £25,000 or more to distribute.

Liquidating an Insolvent Company

When a company faces the challenges of plummeting sales and mounting debts, directors may opt for the liquidation of the business. If a company cannot meet its financial obligations or its liabilities exceed its assets, it is considered insolvent. In such cases, a creditors’ voluntary liquidation (CVL) is the most prudent step.

During the liquidation process, an IP is appointed to evaluate the company’s assets and arrange for their sale to benefit outstanding creditors. This ensures an orderly closure of the company. Any remaining debts are written off unless the director has provided a personal guarantee, and the company is effectively dissolved.

Differentiation of Administration?

When your company is put into administration, the appointed administrator takes control and immediately receives a moratorium, a strong ring-fence that stops any further legal action.

A liquidation signals a company’s ultimate end. However, the administration often focuses on saving the business through restructuring.

The administrator now has time to consider the company and its financial position and formulate a plan to rescue the business if possible. This could involve simplifying, such as closing non-performing areas of the business or unprofitable retail stores or restructuring its debts to make them more affordable.

Nevertheless, when a company enters administration to commence a turnaround, this proves impossible. Then, the company will exit administration and immediately enter liquidation – normally through a CVL.

Liquidation or Administration?

If your business is experiencing financial difficulties and you are unsure what your next step should be, you should seek the help of an IP. 

Please call our advisers today to arrange a free, no-obligation consultation.

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