What are the differences between liquidation and administration?

What are the differences between liquidation and administration?

February 26, 2018 by Sandra

When things start to go wrong in business, people can panic.

And while panicking isn’t a fun thing to do, it can sometimes be useful. It can propel a person into action.

Ignoring big financial problems within a company often leads to them going out of business which results in lay-offs, loss of reputation and sometimes debt. But taking a little pre-emptive action really can save the day. 

If you’re in trouble and facing the very real prospect of losing your company, we sympathise with you. But don’t give up just yet. The fact that you’re looking online for a solution - even if it is an end game - that’s positive. There may be light at the end of the tunnel.

However, there is also the very real possibility that your issues run so deep, winding up your business is the only option. If that’s where you are, you may well be currently trying to decipher a few industry terms. Specifically, ‘administration’ and ‘liquidation’.

Look online and plenty of people will be talking as though the two things are one and the same. But while some will use the term interchangeably, the pair are actually very different animals indeed.

It’s an easy mistake to make, though. After all, unless you work in the insolvency business like we do or you’ve actually experienced one or both of the processes, why should you know the difference?

We want to break down how liquidation and administration differ for you here. And, while we’re explaining it, we’ll go into how they’re similar too...

How liquidation and administration are similar

We’ll come on to how and why the two terms don’t mean the same thing shortly. But first, let’s explore a few things that liquidation and administration have in common. The confusion arises because they are really quite similar processes.

Here are some of the ways they aren’t so different from one another:

  • When a limited company becomes insolvent, that company has the option - both functions are available (adding to the uncertainty)
  • Both are actions that can be started by - or on behalf of - the director or directors of the company
  • They are both designed to limit the personal liability of owners and protect them from personal legal actions
  • Creditor protection is highly regarded by both processes
  • In each case, the organisation’s assets are frozen
  • Both liquidation and administration must be carried out by licensed Insolvency Practitioners (IPs)

How liquidation and administration are quite different

Okay, so we’ve established that the two things aren’t exactly poles apart. But it’s even more important that we now realise that administration is not the same thing as liquidation. They’re not wildly dissimilar… But they are different.

Here are some of the ways the two processes differ:

  • Liquidation is much more severe; it sees the company formally shut down and closed completely.
  • Administration doesn’t see the firm going fully insolvent, it indicates abject times, but leaves room for manoeuvre and possible rescue.
  • Administration is a temporary position, liquidation is final.

Which is the right choice for me?

Well, we would urge you not to make any major decisions before you consult an insolvency practitioner like us. Liquidating your firm unnecessarily would be a huge mistake.

If you’re on the road to insolvency and are facing the two forks of administration and liquidation, which direction to take will depend on a number of mitigating factors:

  • How bad the situation really is
  • The amount you owe and the contracts in place
  • If you can see a way out of the situation
  • Whether a clean start would be best for all concerned
  • Is it possible that neither is the solution and you can save your business?

Your situation may require you to go into administration. Or leave you no choice but to liquidate your firm. Then again, you may have identified the issues and acted fast enough to save your company. If you’re unsure what to do next, don’t delay - contact us immediately.

You may have have a bright and viable future ahead of you. Don’t throw it all away in panic, shame or confusion. Let McAlister & Co help you out.

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Filed Under: Pre-Pack Administration

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