Both company liquidation and administration are insolvency procedures used to address a company’s ailing financial state. Directors can use either procedure to create a solution for their situation. However, although liquidation and administration are insolvency procedures, typically used as a solution to address the same problem, they are decidedly different. Each of the two has entirely different objectives and outcomes, making one more suitable to some situations than the other.
In this article, Clarke Bell will discuss voluntary liquidation vs. administration, the differences between the two procedures, and give you the information you need to make an informed decision.
What is voluntary liquidation?
Voluntary liquidation can take two forms:
- Members’ Voluntary Liquidation (MVL) for solvent companies, or
- Creditors’ Voluntary Liquidation (CVL) for insolvent companies.
For the purposes of this article, we are discussing CVLs and companies with financial problems.
A CVL can be initiated voluntarily by a company’s directors, they are entitled to appoint a liquidator of their choice, and they will take the helm. The liquidator will then dispose of any company assets. Any proceeds will be distributed amongst outstanding creditors according to a repayment hierarchy, with shareholders at the bottom. A CVL also affords directors and companies several significant benefits, the details of which can be read in our complete guide to the process.
The end result is that the company will be relieved of its assets and closed down, ceasing to exist as a commercial entity.
What is company administration?
While liquidation is typically the last resort for insolvent companies, marking the end of company and debt alike, administration is a bit more optimistic. Rather than cause the end of a company in order to solve its debt problems, company administration aims to perform a recovery, the end goal being to make a company profitable again. This can be done by implementing a Business Rescue Plan, which a licensed insolvency practitioner will apply. Moreover, company administration essentially buys directors time; outstanding creditors cannot take legal action during the administration process, affording you breathing room to identify possible solutions. If all else fails, the company can be sold as a “going concern”, or entered into liquidation to recoup some investment.
If attempts to recover a company through administration fail, or the chances of recovery are too low to warrant an attempt at rescue, then a pre-pack administration could be the right solution. It is a form of administration that involves the valuation of a company and negotiations of its sale before an administrator is appointed. Once the administrator is appointed, the sale can then be executed quickly, as all specifics surrounding the sale have already been ironed out and agreed upon. Occasionally, the company will be purchased by existing directors, which tends to result in the seamless transfer from the old company to the new one. As such, little disruption in the company’s trade or organisation is suffered.
While a pre-pack administration can be a suitable option for some companies, it is a heavily legislated practice. This is to ensure directors do not use the practice for unethical reasons. Before taking action, you must ensure that your company meets the legal requirements, and that you are capable of upholding your obligations should you enter a pre-pack administration. Most notably, you must be able to demonstrate that your decision to enter a pre-pack administration is the best solution for creditors, and a report justifying this decision must be sent to the Insolvency Service. Assuming the Insolvency Service approves, you may pursue a pre-pack administration.
What are the differences between voluntary liquidation and administration?
As we have mentioned, there are several key differences between voluntary liquidation and administration. Some of the main differences are:
- Status of the company after the procedure – One of the most obvious differences is the end state of the company. With a voluntary liquidation, your company will be closed down, removed from the Companies House register, and cease to exist. No further trading can take place, and any outstanding creditors will be repaid from any proceeds of the liquidation. Alternatively, administration allows a struggling but viable company to continue trading normally. Creditors will instead be repaid from the profits generated from this trade.
- Prioritised parties – Each procedure works in the interests of different parties. During the voluntary liquidation of an insolvent company, the main priority is to pay outstanding creditors. During administration, there is an attempt to blend the interests of the company with the interests of creditors. While repaying creditors is certainly a high priority, it is balanced with the aim of rescuing the company, ensuring both creditors’ and directors’ benefit.
- Purpose – Arguably, the most important difference between voluntary liquidation and administration is the end goal of each procedure. With voluntary liquidation, the main goal is to efficiently close down a company, with any proceeds of asset disposal going to pay outstanding creditors. The main goal of administration is to rescue a company and extend its life, allowing it to continue well into the future. Your vision for your company should be a key factor in which solution you choose.
Let Clarke Bell help
If you are considering entering your company into liquidation or administration, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the best solutions to their financial problems, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.