What is the difference between liquidation and administration?

In simple terms, the company administration process is usually used where there is a chance of saving all or part of a business, not necessarily though, the company. The liquidation process is usually used where the company has effectively reached the end of the road and needs to be wound up. There is substantial legislation that deals with with the administration and liquidation processes.

What is the difference between a Liquidator and an Administrator?

To act as either a Liquidator and an Administrator, you must be a licensed insolvency practitioner. There are however a number of differences in the way in which a liquidator will deal with an assignment as opposed to an administrator. These differences are best explained in the next section dealing with the differences between the two procedures.

How do you place a company into administration?

The starting point is to assess whether the company has some business that, without the current level of debt, would be a viable business. Once that hurdle has been overcome, you then need to contact an insolvency practitioner who will look at your plans and advise you as whether or not it is feasible to achieve your aims through an administration. There are many issues to consider:

  • Does any lender hold a charge over the company – usually a qualifying floating charge(QFC)? If so, their consent to any such proposal will be required. It is absolutely imperative if you are to obtain their support, that they are kept informed at all times – ideally by the Insolvency practitioner you appoint.
  • Aside from removing the historical debt, what will you do differently that will ensure profitability in the new company?
  • How will you fund the purchase of whatever assets you wish to acquire from the administrator?
  • How will you fund your cash flow, until income from sales in the new company start to come through?
  • Have you looked at the employee situation especially with regard to any TUPE issues?
  • New company name – if it’s similar to the old company name, you will need advice on Section 214 of the Insolvency Act which deals with the use of restricted names.

All of the above issues, and many others will be discussed in detail with you by the insolvency practitioner – if not, then you’ve chosen the wrong IP!

To effect a viable administration, there needs to be some part of the business that can be salvaged

To effect a viable administration, there needs to be some part of the business that can be salvaged. This will either be through a pre pack administration – i.e. a deal to acquire the business and assets is agreed prior to the company going into administration and then completed on the day that the administrator is appointed, or by appointing an administrator who is willing to trade the business whilst looking for a buyer.

The formalities surrounding placing a company into administration are fairly simple – the directors can file a notice of intention (NOI) to appoint administrators where there is a QFC in place. This notice then allows the QFC holder up to a maximum of 5 days to either agree to the process and agree to the company’s choice of insolvency practitioner, or to appoint an IP of their own choosing.

Any holder of a QFC can themselves appoint administrators under their charge. To do so, they must first call in any outstanding funding and then serve notice on the company of their intention to appoint administrators.
One other, little used alternative, is where a creditor applies to court for an administration order to be made – this is a very rarely used process.

How do you place a company into liquidation?

In this article we focus primarily on the creditors voluntary liquidation process (CVL). The CVL process is usually used where the company has effectively run out of business or has debts that are insurmountable, with no prospect of trading on in a new company without that debt.

The starting point, as with administration, is contacting a good insolvency practitioner who will guide you through the process. To place a company into CVL, the directors have a simple board meeting at which:

  • Resolutions to cease trading are passed
  • An insolvency practitioner is appointed to assist in the process
  • The method of placing the company into liquidation is agreed – either by a virtual meeting or by postal correspondence. The need to hold a physical meeting was removed under the latest rules. Meetings are usually either by Skype or by telephone conference.

Once the board resolutions have been passed, trading usually ceases, unless the company has stocks that can achieve a higher sales value through continued trading.

There will then be the shareholders’ and creditor’s meetings at which resolutions to wind up the company and appoint a liquidator will be passed.

Following the creditors’ meeting, the insolvency practitioner engaged will instruct agents to value the assets and once formally appointed will then instruct the agents to dispose of all company assets.

 

What is the difference between administration and liquidation?