If you are a Director or creditor of an insolvent company, Oliver Elliot can help you understand what is the difference between Liquidation and Administration?.
A Liquidation is an orderly winding up a company that will typically never trade again. In an Administration, the company may trade again but in any event, aims to produce a better return to creditors than in a Liquidation.
Overview Of The Difference Between Liquidation and Administration
The difference between a Liquidation and Administration is the difference between two formal insolvency procedures. The end goal of each procedure is different and therefore the legislation that guides an Insolvency Practitioner who will be the person with legal authority to operate either a Liquidation or an Administration is different.
In the case of a Liquidation, the Insolvency Practitioner is a Liquidator.
In the case of an Administration, the Insolvency Practitioner is an Administrator.
Objective Of Liquidation
The objective of a Liquidation is an orderly winding up of the company’s affairs to enable a distribution of the realisations after costs
Objective of Administration
The objective of Administration is for the procedure to be used as a rescue tool, first and foremost the rescuing of the company as a going concern. However, the legislation now permits the procedure to be utilised for two other purposes provided it aims for a better return to creditors to a Liquidation:
What Is A Liquidation?
A Liquidation is in effect the death of the company, when it cannot continue to trade and is unable to pay its debts.
In Liquidation, the Liquidator will realise the assets so that a surplus can be paid over to creditors before the company is dissolved and struck off. It is rare for any further trading to take place in a Liquidation.
There are three types of Liquidation:
- Members Voluntary Liquidation (“MVL”) – company closure of a solvent company
- Creditors Voluntary Liquidation (“CVL”) – an insolvent liquidation closed down voluntarily by the company Directors.
- Compulsory Liquidation (“Compulsory”) – when a creditor forces the company to be wound up via the Courts.
When considering the differences between Liquidation and Administration, the type of Liquidations are the CVL and Compulsory Liquidations because both are insolvent Liquidations. Administration is an insolvency procedure that can only be used when a company is insolvent.
What Is An Administration?
An Administration is an insolvency procedure designed to attempt to rescue the company and return it to profitability.
In an Administration where there is a viable core business trading may well continue either through restructuring the company and or to make the company attractive to a potential purchaser of the business. If the business is being sold by the Administrator as a going concern this might be done via what is known as a Pre-Pack Administration to attempt to get a better realisation for the business compared with a Liquidation.
A pre-packaged Administration is in essence usually the process whereby the existing management purchases the business from the Administrator, either on day one or very shortly after the commencement of the Administration process.
Differences Between Liquidation And Administration
At the heart of the difference between Liquidation and Administration is the moratorium (a breathing space from creditors) that prevents creditors taking action to wind up the company or taking other legal enforcement against the company to recover debts. There is no moratorium in a Liquidation but it is one of the key reasons where appropriate that the Administration procedure is used.
The moratorium arises automatically in an Administration and will potentially give the company time to formulate a strategy to seek to rescue the business and prevent further losses being suffered by creditors. This may include for example, consideration of entering into a Company Voluntary Arrangement.
What Is A Company Voluntary Arrangement?
A Company Voluntary Arrangement (“CVA”) is a proposal to creditors and the term and amount of payments can vary pending on the circumstances and can potentially be modified by creditors. A CVA may enable a company to continue to trade whilst paying creditors and therefore when used in conjunction with the Administration moratorium can provide a useful tool to rescue an insolvency company.
At Oliver Elliot, we can assist you and carry out a review of your company’s affairs to ascertain whether a CVA is appropriate for you and we can also help in the drafting of the CVA proposal.
An Administration will typically last for only 12 months but it can be extended whereas a Liquidation may last in some cases several years.
Can A Liquidation Follow On From Administration?
A Liquidation can and frequently does follow on from Administration.
However, when there are sufficient funds from realisations in the Administration then the company will often need to go into Creditors Voluntary Liquidation for a Liquidator to distribute to unsecured creditors. An Administrator cannot distribute to the unsecured creditors, he or she can only distribute to secured and or preferential creditors in accordance with the purpose set out in Paragraph 3(1) of Schedule B1 of the Insolvency Act 1986.
In addition, if an Administration has run its course but there are still investigations that need to be undertaken into the conduct of the Directors then a Compulsory Liquidation may follow on from Administration. This can also arise if creditors reject the Administrator’s Proposals.
Does A Liquidation Always Follow On From Administration?
A Liquidation does not always follow on from Administration.
It is possible for a company to go straight from Administration into dissolution and avoid Liquidation altogether if the purposes and objectives of the Administration have been fulfilled.
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