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The Difference Between Liquidation and Administration
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How do these closure and restructuring processes differ?
While liquidation and administration are both formal insolvency processes, the key difference is that administration looks to rescue viable elements of the business to allow trade to continue, while liquidation is simply a way of closing a company in an orderly manner. While administration does not guarantee the ongoing survival of the company in question, this is often one of the driving aims of the process. With liquidation, however, there is only one outcome and that is the full closure of the business and the removal of its name from the register of companies held at Companies House.
Liquidation and company administration can both be intimidating processes for company directors, as either one can lead to the end of the business. The primary difference between the two procedures is that company administration aims to help the company repay debts in order to escape insolvency (if possible), whereas liquidation is the process of selling all assets before dissolving the company completely.
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Yes, very often a liquidation of the company follows administration. However, the administration process gives the company the opportunity to potentially pursue a pre-pack administration sale and funding options all of which provide the hope of being able to continue operating in a debt-free (new) company. If the administrator believes that liquidation is the most likely outcome they’ll prepare the directors for the final dissolution phase with the appropriate guidance. We usually won’t advise a business to pursue a voluntary administration at all unless there is a good chance of success.
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Although a company administration could end in the liquidation, it can also be used to avoid liquidation or receivership. One of the main advantages of entering into administration is that all legal action against your company are stayed during the period of the administration. As soon as the administration order is granted an insolvency practitioner is appointed as administrator, assuming full control over the company operations temporarily. During this time the insolvency practitioner will formulate and propose a recovery plan, seeking the approval of the insolvent company’s creditors during the creditors’ meeting. The administrator is legally obligated to act in the best interest of the creditors. However, by facilitating the repayment of as many debts as possible the administration process also benefits the standing of the insolvent company.
Any time a company is being repeatedly threatened or warned by creditors or HMRC it may be wise to consult with an insolvency practitioner to discuss the practicality of executing a company administration or going another route. When you’re facing the possibility of being put under receivership or forced into compulsory liquidation, company administration offers one of the most appealing alternatives. If the directors have enough funds to purchase the company’s assets then a pre-pack sale may be arranged, during which the contracts, property, and other assets of the insolvent business are transferred to a newly formed company. Ultimately, entering into an administration with the assistance of a qualified insolvency practitioner could allow your company the time needed to negotiate with creditors or liquidate some assets in order to repay debts.
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If you’re facing the prospect of liquidation or receivership, and would like to know if company administration could provide much-needed debt relief, feel free to contact us for a free consultation. With a network of offices across the UK, you’re never far away from expert and confidential advice.
Further Reading on The Difference Between Liquidation and Administration
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