Administration or Liquidation: Which Is Best for My Company?

Administration or liquidation? If your company is experiencing financial difficulties then understanding the difference between administration and liquidation can help you make sense of the options available.

At BRI Business Recovery and Insolvency, we understand that financial pressure can be challenging for company directors. Our experienced Insolvency Practitioners provide confidential, practical advice to help directors understand their position and consider the most appropriate way forward.

During any type of financial difficulty within business, it always pays to seek professional advice early. If you have concerns, please reach out to our team, we can provide tailored advice for your business.

Administration or Liquidation

To give you a better understanding of each procedure, here is a brief explanation of each. If you have any questions, please contact us.

What Is Administration?

Administration is a formal insolvency procedure designed to give a financially distressed or insolvent company protection while its affairs are assessed.

A company can often continue trading while it is in administration, depending on its circumstances and the administrator’s assessment of the business.

Administration can therefore be considered where a company is experiencing serious financial difficulties but there may still be value in the underlying business.

What Happens Prior to a Company Going Into Administration?

Prior to administration the insolvency practitioner will review the company’s financial position, assets, liabilities and ongoing trading activities. They will then consider the three statutory purposes of administration to see if any of those can be achieved.

A company can only enter administration if it likely to achieve one of these:

Rescue company as a going concern
Achieve a better outcome for creditors than otherwise could in liquidation
Realise assets for secured or preferential creditors

What Happens When A Company Goes Into Administration?

Once an administrator is appointed, control of the company passes from the directors to the administrator. Where a pre pack sale has been agreed an immediate sale and transfer of business can complete or the administrator could retain the trade for a period or simply cease to trade.

Depending on the circumstances, this could involve:

Continuing to trade the business
Restructuring the company’s affairs
Selling the business or some of its assets
Negotiating with creditors
Bringing the administration to an end through another insolvency process where appropriate

The outcome will depend on the individual circumstances of the company and whether the business or its assets can be preserved or realised for the benefit of creditors.

What Is Company Liquidation?

Liquidation is the process of bringing a company to an end by dealing with its assets, liabilities and outstanding affairs before the company is eventually dissolved.

Where a company is insolvent and the directors decide to voluntarily wind it up, this will commonly take the form of a Creditors’ Voluntary Liquidation (CVL).

Unlike administration, the purpose of liquidation is not generally to rescue the company as a going concern. Instead, the process is focused on winding up the company and bringing its existence to an end.

What Is a Creditors’ Voluntary Liquidation?

A Creditors’ Voluntary Liquidation, commonly referred to as a CVL, is a formal insolvency procedure used to close an insolvent company.

The directors decide that the company is unable to continue trading and propose that it should be wound up. A licensed Insolvency Practitioner is appointed as liquidator and takes responsibility for dealing with the company’s affairs.

What Happens When a Company Goes Into Liquidation?

Once a liquidator is appointed, the company’s affairs are brought under their control.

The liquidator will generally:

Take control of the company’s assets
Realise assets
Review the company’s financial affairs
Investigate the circumstances leading to the company’s insolvency
Deal with outstanding creditor claims
Distribute any surplus funds to creditors

For directors, liquidation often means that the company will stop trading and ultimately cease to exist. In some cases a pre pack sale of the business can be made prior to or just after the company enters liquidation.

Administration vs Liquidation: What Is the Difference?

Although both administration and liquidation are formal insolvency procedures, they have different purposes and can lead to different outcomes.

	Administration	Liquidation
Main purpose	To rescue the company, restructure the business or achieve a better outcome for creditors	To wind up the company and bring its affairs to an end
Can the company continue trading?	Often, yes, where this is considered appropriate	Generally, no
Who controls the company?	An appointed administrator	An appointed liquidator
What happens to company assets?	Assets may be retained, sold or used as part of a restructuring or sale	Assets are generally realised to raise funds for creditors
What happens to creditors?	Secured or preferential creditors can be paid by the administrators but unsecured creditors can only be paid if the company subsequently enters liquidation	All classes of creditor can be paid in liquidation
Likely outcome	The company may be rescued, sold, restructured or move into another process	The company is wound up and ultimately dissolved
Procedure	An application to court is often made via solicitors	Board and members meetings are held to pass resolutions to wind up

The key difference is therefore the purpose of the procedure.

Administration provides an opportunity to assess whether the business, or part of it, can be preserved or whether a better outcome can be achieved for creditors. Liquidation, on the other hand, is concerned with winding up the company.

When Might Administration Be Appropriate?

Administration may be considered where there is a realistic opportunity to preserve value within the business or achieve a better outcome for creditors.

The Business May Be Viable

A company may have a viable underlying business but be struggling with historic debts, cash flow difficulties or significant creditor pressure.

The Business Could Be Restructured or Sold

Administration may also be considered where the business or its assets could be sold to generate value.

Depending on the circumstances, this could allow a viable part of the business to continue under new ownership, while the administrator deals with the company’s financial difficulties.

The Company Needs Protection From Creditor Action

Administration can provide important protection from certain creditor actions while the administrator assesses the company’s affairs.

This can give the administrator time to consider the available options without the company being subject to the same level of immediate creditor pressure.

However, administration is a complex formal insolvency procedure and is not suitable for every company. Professional advice should be obtained before making a decision, so make sure you contact our team at BRI.

When Might Liquidation Be Appropriate?

Liquidation may be considered where the company is insolvent and there is no realistic prospect of rescuing the business or continuing to trade.

The Company Cannot Be Rescued

If a company’s financial difficulties are too significant for the underlying business to be rescued or restructured, liquidation may provide a formal route to bringing the company to an end.

A liquidator can then deal with the company’s assets and outstanding liabilities in accordance with the relevant insolvency legislation.

Continuing to Trade Is No Longer Viable

Directors have responsibilities when their company is experiencing financial difficulties. If the company cannot meet its debts as they fall due and there is no realistic prospect of recovery, continuing to trade may not be appropriate.

Seeking professional advice at an early stage can help directors understand their options and avoid delaying action until the company’s position becomes more difficult to manage.

The Directors Want to Bring the Company to an End

Where a company is insolvent and there is no viable route forward, a Creditors’ Voluntary Liquidation can provide a structured process for closing the company.

The process allows an appointed liquidator to deal with the company’s affairs, realise available assets and distribute funds to creditors where possible.

What Should I Do If My Company Is Struggling?

If your company is experiencing financial pressure, it is important to understand the position as early as possible.

This includes looking at the company’s cash flow, outstanding debts, creditor pressure and whether the underlying business remains viable. Depending on the circumstances, there may be several options available, including restructuring, administration or liquidation.

At BRI Business Recovery and Insolvency, we work closely with directors to understand the individual circumstances of their company before recommending a way forward. Early professional advice can help you understand the options available and make informed decisions before the situation becomes more difficult.

There is no one-size-fits-all solution. The most appropriate course of action will depend on the company’s financial position, its future prospects and the interests of its creditors.