Everything directors need to know
Liquidation and administration are both important formal insolvency processes for companies that meet specific criteria.
But it’s important to note that they do different things, have different objectives and have processes which are only applicable to certain circumstances.
They both mean the same thing though don’t they? That a business is closing down?
No.
Administration involves the directors and shareholders of a company making the decision to appoint an external administrator to take control of the company to see whether it can be rescued and if the current owners can turn things around or whether it could survive with new ideas and investment.
This is a short term process, usually lasting around a year. During this time the administrator, a licensed insolvency practitioner, will review the situation and devise a strategy to succeed.
This could be through restructuring, a recovery plan or if the business really cannot be saved, then they will look to close the business and look to sell any company assets to obtain the best value and return for the creditors.
Liquidation, on the other hand, is an insolvency procedure that’s only undertaken when a company cannot be saved or restructured, has come to the end of its life and has to be closed down as efficiently as possible.
This usually occurs when the business ceases trading as this process requires assets and stock to be sold off with the proceeds being used to repay creditors. As it’s a formal insolvency process it must be carried out by a licensed insolvency practitioner too.
There are three main kinds of liquidation: a Creditors Voluntary Liquidation (CVL), a Members Voluntary Liquidation (MVL) and Compulsory Liquidation.
Compulsory Liquidation is a court-based procedure where creditors will have sought to wind the company up for not settling outstanding debts. It will then be up to a judge to decide whether it is appropriate to wind up the business, if all other avenues for repayment or reducing the debt have been exhausted. If this happens then the assets of the company are ordered to be realised and distributed to the company’s creditors.
A CVL on the other hand is initiated by the directors and shareholders of a business when they realise they can no longer service their debt obligations and are looking to liquidate the company. One of the main advantages of this process is that the outstanding debt would be written off as the business is closed. As this is a formal insolvency process it must also be overseen by a licensed insolvency practitioner.
An MVL is different as while it is still instigated by directors, the company is solvent and can repay any debt obligations within a 12 month period. Once all creditors are satisfied then any surplus will be shared amongst shareholders.
The key difference between administration and liquidation is that the primary goal of administration is to help the company to be able to pay off its debts, while ensuring that it can still trade and keep the business running as a viable longer term proposition, whereas liquidation aims to close the business in an orderly manner and ensures the business is able to pay its creditors as much as it can.
An administration usually lasts around 12 months unless an extension is granted by the courts, liquidation is not bound to a time frame.
It is also important to remember that liquidation occurs when the company is insolvent and no longer viable or able to make a profit while administration happens on the other hand can only occur when the business is still viable but has cash flow issues, they may also have pressure from creditors for repayment.
Administration can be used to help avoid a liquidation. This is because a moratorium is automatically and temporarily in effect once an administrator is appointed. As well as allowing them to form a recovery plan without external pressures, it also halts all creditor legal actions against the company.
Liquidation can occur after an administration, if it fails to work, but administration may be a beneficial process in itself.
If you are unsure what the right path is for your business to take, get in touch with one of our team of expert advisors.
After a free virtual consultation at a convenient time, they will be able to provide clear and unbiased advice on your unique circumstances and suggest the best solutions for you and your business to implement both now and in the weeks and months ahead.
They will explain, in plain English, what the options are, how you will benefit and what you need to do to make them work. All you need to do is to get in touch!