Following on from Carillion’s entry into liquidation earlier this week, we take a look at what this process involves and what their decision to liquidate tells us.
After failing to secure additional funds, or an alternative way of dealing with their crippling £1.5bn debts, a formal insolvency procedure was the inevitable next step for construction giant Carillion. However, the announcement that Carillion were opting for liquidation rather than choosing to enter an administration process, took some by surprise.
Often confused by those outside of the insolvency industry, liquidation and administration are actually two very distinct processes, and in order to better understand the position Carillion found itself in, it’s important to appreciate the key differences between the two procedures.
When a company enters administration, the main focus is on rescuing the company through a process of restructuring. Administration is often the chosen method when the business in question is viable in spite of its current financial woes. As part of the administration, the company will be restructured in a way so that the loss-making elements of the business are disposed of, while profitable elements are saved, thereby putting the ‘reborn’ business on a more stable footing going forwards.
Liquidation on the other hand signals the complete end of a company. Once a liquidator is appointed it is simply a case of disposing of the assets to recoup as much money as possible for the outstanding creditors and then facilitating the eventual closure of the company.
Quite often with a company of Carillion’s size and standing, administration is the preferred route as typically there is something within the business which is deemed to be salvageable. The fact that Carillion opted for compulsory liquidation, therefore, is very telling. Liquidation indicates there was very little that was recoverable from the business in terms of assets and that the business model was seemingly unsustainable even without the debt.
Administration will only be recommended should there be strong reason to believe the business has a realistic chance of a successful future following the period of restructuring. Should the business be deemed to have reached the end of its life, the company will be liquidated and the company buried. In some cases it is simply too risky to throw more cash at the business to try and prolong its trading life. In these instances, as Carillion discovered, liquidation is unfortunately the only sensible option.
If your business is struggling under the weight of financial pressures, you should make it a priority to seek expert help. Real Business Rescue can help you understand the various business rescue, recovery, and insolvency options out there so you can make the best decision for you and your company.