Published: 31st January 2020
We are often asked whether Administration and Liquidation are the same. Although they are both formal insolvency procedures, there are significant differences between the two, both in objective and application:
If the administration process is unsuccessful, liquidation could be the result and this could be one of the worst outcomes envisaged by directors dedicated to turning their company around.
Administration and liquidation are part and parcel of the same problem – looming or existing insolvency which manifests itself in two ways:
So although administration and liquidation are fundamentally different in their approach to the problem, both are processes used to limit the damage for companies and their creditors. The more hopeful option of the two is administration and there are eligibility criteria and potential benefits of this process for companies and creditors alike.
Mounting debts combined with little hope of meeting financial obligations presents a bleak picture for directors struggling to keep their business going. This stress and financial pressure often results in the company entering administration in the hope that the business can be made profitable again.
If you are experiencing a situation such as this, Company Administration will halt any legal action against the company. It provides valuable time to use the expertise of a licensed Insolvency Practitioner to turn the company around.
Begbies Traynor can help as we can accept appointment as Administrators. All areas of the UK covered through our extensive office network, it is easy to contact us for support.
‘Pre-pack’ is a form of administration that involves the valuation of assets and negotiations for sale prior to appointment of the administrator. Once appointed, the business is sold as a going concern, with the underlying business sometimes being purchased by existing directors who go on to run a new company, usually without loss of trade or jobs.
Certain legal requirements need to be met before pre-pack administration can be considered, however, and creditor interests are paramount. At the end of the process, the Insolvency Practitioner must prepare a report to explain and justify their decision to use pre-pack administration. They must demonstrate that choosing this option over others, including liquidation, provided the best returns for creditors; this requirement helps to allay fears that the process used was unethical.
In many cases, a swift sale of the business brings about several benefits:
• Contractual obligations are met, helping to secure the new company’s future by carrying on trade with the same suppliers.
• Jobs can often be saved
• Being sold as a going concern can result in greater returns for creditors
Once the ‘newco’ has been formed, the existing suppliers may request payment via pro forma invoice or cash on delivery, but a positive relationship can be built up without the stress of mounting debt.
Three types of liquidation exist:
• Members’ Voluntary Liquidation (the company is solvent)
• Creditors’ Voluntary Liquidation (it is insolvent and directors choose to close it down)
• Compulsory Liquidation (closure is forced on the company by creditor action)
Whichever process is used, the result is closure for the company, with no consideration given to rescue or recovery. In the case of a Members’ Voluntary Liquidation the company will be trading from a solvent position, whereas the other two processes are undertaken due to insolvency.
Administration vs liquidation – what are the main differences?
• Administration: severe cash flow problems are being experienced by the company, but the underlying business is viable and insolvency may be avoided
• Creditors’ Voluntary Liquidation and Compulsory Liquidation: the company is insolvent and cannot pay its creditors. There is no hope for the future; assets need to be sold before the company is closed down.
• Administration: to rescue a company by restructuring or otherwise returning it to profitability, so avoiding insolvency.
• Liquidation: to wind up the company by realising its assets so that creditors/shareholders can be repaid.
• Administration: company interests are at the fore, alongside those of creditors
• Liquidation: with the exception of Members’ Voluntary Liquidation, the interests of the company are no longer relevant once the process is under way. Maximising creditor returns is the main concern.
Whether your company is presently solvent or known to be insolvent, you need to act quickly to minimise the likelihood of wrongful trading accusations. The Insolvency Service investigates the conduct of directors in cases of liquidation, and if you are found to have traded whilst the company is insolvent, you could face fines and penalties.
It is vital that you receive advice from a licensed Insolvency Practitioner. We can arrange a same-day consultation at your local Begbies Traynor office to discuss the best way forward. Contact a member of our professional team for more details on Company Administration and Liquidation.