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.
The role of company directors and shareholders
It’s also worth noting that both liquidation and administration involve key roles for the company director and shareholder, especially in the early stages of decision-making. In a voluntary liquidation process, for example, directors initiate proceedings, but shareholders are the ones who formally agree to wind the company up.
Once the process is underway, a licensed liquidator steps in to manage everything, from selling off assets to liaising with creditors and ensuring legal obligations are met. While directors' powers cease at this point, their cooperation is still expected throughout.
Understanding these roles is essential if you're considering next steps. Whether you're a director trying to navigate a crisis or a shareholder deciding the future of a struggling business, knowing who does what, and when, is key to a smooth process.
The Advantages and Disadvantages of a Creditors’ Voluntary Liquidation (CVL)
If liquidation looks like the only realistic option for your company, the route you’ll probably take is a Creditors’ Voluntary Liquidation, or CVL. This is a formal insolvency process that allows directors to voluntarily close an insolvent company in an orderly and responsible way.
Unlike compulsory liquidation, which is forced by the courts after a creditor’s petition, a CVL gives directors some control over how the process unfolds. It shows that you’re taking proactive steps to deal with financial difficulties rather than waiting for action to be taken against you.
By choosing a CVL, you can ensure creditors are treated fairly, reduce the risk of wrongful trading accusations, and begin to draw a line under what’s become an unmanageable situation. But, like any insolvency procedure, there are both benefits and drawbacks to consider.
Below, we outline the key creditors’ voluntary liquidation advantages and disadvantages so you can understand exactly what this process involves.
Advantages of a CVL
- You stay in control of the process
Although your Insolvency Practitioner will handle the liquidation, it’s still a voluntary decision. You decide to take action rather than having it forced upon you by creditors or the courts.
- It stops creditor pressure and legal action
Once a CVL begins, creditors can no longer chase payments, add interest, or take legal action. That breathing space can be a huge relief for directors.
- It protects your reputation
Acting responsibly by entering a CVL shows professionalism and transparency. It demonstrates that you’re trying to do the right thing by staff, creditors, and stakeholders.
- Employees can claim statutory entitlements
Staff (and often directors, if they’ve been paid through PAYE) may be able to claim redundancy pay, notice pay, and holiday pay through the Redundancy Payments Service.
- It avoids compulsory liquidation
Taking voluntary action avoids the stress, cost, and potential stigma of being forced into liquidation by a court order.
Disadvantages of a CVL
- The company will close permanently
A CVL marks the formal end of the business. Once assets are sold and debts dealt with, the company is dissolved and ceases to exist.
- Directors’ conduct is reviewed
The Insolvency Practitioner must submit a report on the actions of directors before insolvency. This is standard, but if any misconduct is found, it could lead to further investigation.
- Personal guarantees remain personal
If you’ve given a personal guarantee for loans, leases, or overdrafts, you’ll still be liable for those debts even after the company is liquidated.
- There are associated costs
Professional fees are paid from company assets, which means less money is available for creditors. If assets are limited, this can also restrict what’s recovered.
A CVL can be an opportunity to close an insolvent company properly, protect your personal position, and start planning for the future. It’s not an easy step, but it is often the most responsible one, and can even pave the way for a fresh start if handled correctly.
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 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.
