When your company is struggling, it can be tricky to understand your options. You might have lots of people telling you information and not know who to believe. It’s always best to speak to an expert in the field if you are unsure of your options. In this blog, we’re looking into liquidation vs administration.
What is liquidation?
Liquidation is the formal process of closing a limited company. There are many liquidation options available, but the right one for you will depend on your circumstances, such as whether your business is solvent or insolvent.
A solvent business is one that is not struggling financially. A solvent business can afford to pay its debts when they fall due. In contrast, an insolvent business cannot afford to pay debts when they fall due, and its liabilities may be worth more than its assets. Many companies will ignore this in an attempt to escape insolvency, but it usually leads to further issues. The best thing to do is seek professional advice early regarding the administration or liquidation process.
Solvent companies can use a member’s voluntary liquidation or even a company strike-off. Company strike-offs can only be used by companies that have no outstanding debts, including bounce-back loan debts. Companies will face the consequences if they try to use this method with outstanding debts.
Insolvent companies have access to a range of liquidation methods, including creditors’ voluntary liquidation (CVL), company voluntary arrangement (CVA), and compulsory liquidation. A compulsory liquidation is always best avoided if possible, as it is forced upon company directors by their creditors. Read about the different types of liquidation.
When a company enters liquidation, an insolvency practitioner is appointed and is responsible for communicating with creditors and trying to repay the money they are owed. This helps to relieve the directors of creditor pressure. Once the liquidation is complete, the company details are removed from the Companies House register. A CVL is one of the most common formal insolvency processes.
How much does the liquidation process cost?
The cost of a liquidation varies depending on the circumstances of the company. An insolvent company liquidation with minimal creditors is likely to cost around £4000 + VAT.
A member’s voluntary liquidation requires much less work for a licensed insolvency practitioner and, therefore, can be slightly cheaper. Those who are eligible for the strike-off method can be charged as little as £10, as there is no requirement for a licensed insolvency practitioner.
Always take your time when selecting a licensed insolvency practitioner, and make sure to speak to a few professionals. When you decide to appoint a liquidator, ensure that you get all costs in writing and that all aspects of your business have been considered. This can help to cover you later down the line if required.
What is administration?
An administration is another formal insolvency process. During administration, a licensed insolvency practitioner is appointed and takes over the running of the company. They will try to gather finances to pay creditors any money they are owed.
Administration is not the same as liquidation, despite it being an insolvency process. The aim of administration is to give the creditors a better outcome than they would get if the company were liquidated.
While a company is in administration, legal action cannot be taken against it. A licensed insolvency practitioner will work on a recovery plan to repay creditors and attempt to get the business back on track. Another benefit of an administration period is that it can allow for ongoing contracts, which is not possible for insolvent liquidations.
Unlike liquidation, companies in the administration process can continue trading as long as the business can make a profit. During the administration process, directors are given some breathing space from financial difficulties as the practitioner deals with issues. Companies may also be interested in looking into the process of a pre-pack administration. Again, these are very different processes that you will need to seek professional advice for before taking any steps.
How much does the administration process cost?
Administration costs can vary widely depending on multiple factors, including the time spent working on the action plan, time spent liaising with creditors, time the company spends in administration and more.
Before your company enters administration, your chosen insolvency practitioner should provide you with a proposal outlining costs and their plan for company recovery. You will need to cooperate with your appointed administrator for the best outcome. They will be required to assess the company’s financial position carefully to decide the company’s future.
What is the key difference between liquidation vs administration?
The key difference between liquidation and administration is how the company ends up after the process is completed. Liquidation ends with the company being closed and removed from Companies House. In contrast, administration may end with the company following a new action plan to improve its processes and keep it running.
It’s worth noting that some administrations can result in liquidation if the insolvency practitioner cannot identify a way of recovery. Depending on the funds available, these companies will usually enter either a creditor’s voluntary liquidation or compulsory liquidation.
How do I know which option is right for my company between liquidation and administration?
If you’re unsure which option is right for your business, you must seek professional advice. A professional can carefully assess your situation and make valuable suggestions for how to navigate it.
It’s crucial that you are honest throughout the entire process to ensure a favourable outcome and a smooth experience. Do not keep things to yourself, hoping that they won’t be found out. Insolvency practitioners are duty-bound to look into the company’s affairs, assess your director’s conduct and find ways to pay outstanding creditors back. It’s vital that you cooperate at every stage during liquidation and administration.
Licensed insolvency practitioners use various methods to generate money for creditors during formal insolvency procedures. One of the most popular methods is through the sale of a company’s assets. Company assets can include stock, machinery and money left in the bank. These funds can be used to pay back secured and unsecured creditors.
We hope this blog has been helpful regarding liquidation and administration. If you need any support or you’re not sure what the best options are for your company, then please don’t hesitate to get in touch. We are more than happy to help and have experience working with companies of all sizes across many industries. You can rely on our advice for liquidation and administration.
I'm Chris Worden, Managing Director at Director First. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice.
