Liquidation v Administration: What's the Difference?

Liquidation and administration are two of the most common formal insolvency procedures for companies, and they are frequently confused with one another. While both are triggered by a company's financial difficulty, they serve very different purposes and lead to very different outcomes. This article sets out the key distinctions between the two.

What Is Liquidation?

Liquidation, also known as winding up, is the process by which a company's affairs are formally brought to an end. A licensed insolvency practitioner is appointed as liquidator to take control of the company, realise (sell) its assets, and distribute the proceeds to creditors in a set statutory order of priority. Once this process is complete, the company is dissolved and ceases to exist as a legal entity.

There are three main types of liquidation:

• Members' Voluntary Liquidation (MVL): used to close down a solvent company at the shareholders' request, once all debts have been paid.

• Creditors' Voluntary Liquidation (CVL): initiated by the directors or shareholders of an insolvent company, with creditors given the opportunity to be involved in the process.

• Compulsory Liquidation: ordered by the court, most commonly following a winding-up petition presented by an unpaid creditor.

In all cases, liquidation is generally a terminal process. Trading typically stops, other than to the extent necessary to complete the winding up in an orderly way, and the ultimate outcome is the end of the company.

What Is Administration?

Administration is a different type of formal procedure, governed by Schedule B1 of the Insolvency Act 1986. Rather than being aimed at ending the company, administration exists to give the company a chance of survival, or at least a better outcome than liquidation would provide. An administrator is appointed to take control of the company for the duration of the process, and must pursue one of three statutory purposes, in order of priority: rescuing the company as a going concern; achieving a better result for creditors than liquidation would achieve; or, failing either of those, realising property to pay secured or preferential creditors.

A defining feature of administration is the statutory moratorium it creates. Once a company enters administration, creditors are generally prevented from starting or continuing legal proceedings, or enforcing security, without the administrator's or the court's permission. This gives the company valuable breathing space to explore options such as a sale of the business, a restructuring, or a negotiated settlement with creditors.

Which Route Is Appropriate?

The right procedure depends heavily on the individual circumstances of the company in question. Administration tends to be favoured where there is a realistic prospect of rescuing the business, preserving jobs, or achieving a materially better outcome for creditors than an immediate winding up. Liquidation is generally more appropriate where the underlying

business is no longer viable and the priority is an orderly close-down and distribution of assets.

It is also worth noting that the two are not always mutually exclusive: a company may enter administration first, and if rescue proves impossible, move into liquidation as a subsequent step.

Seeking Advice

Choosing the right procedure is rarely straightforward, and the consequences for directors, employees, and creditors can be significant. This article is intended as general guidance only and does not constitute legal advice.

If your company is facing financial difficulty, we would encourage you to contact us to discuss the options available to you.