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Is Liquidation or Administration the right choice for your business?

Liquidation and Administration are two formal insolvency procedures that can provide a resolution if your business is struggling financially and cannot pay its debts (it’s insolvent).

Both procedures are associated with distressed businesses but differ significantly in their aims and when they can be used.

  • Liquidation is a procedure that turns a company’s assets into cash before closing it down.
  • Administration is a process that aims to rescue and recover a struggling business.

Here we provide an overview of these two insolvency procedures and discuss when you can use them and their implications.

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What is Liquidation?

Liquidation is the process of selling a limited company’s assets so the proceeds can be paid to its shareholders or creditors (parties it owes money to) before closing it down. There are three Liquidation procedures, two of which are for insolvent companies.

There are three types of Liquidation:

Whichever Liquidation process you use, it always results in the company’s closure. Once a liquidator has sold the company’s assets and distributed the proceeds, they will strike the company off the official register and any remaining debts will be written off.

What is Administration?

Company Administration is a formal insolvency procedure that aims to rescue a struggling company and provide a better result for the creditors than if the company entered Liquidation.  

If a company has unmanageable debts or is facing cash flow pressure but has underlying value or could be profitable once again, it is a candidate for Administration. The process halts any legal action against the company to give the administrator the time and space they need to restructure the business and turn its fortunes around. 

A ‘Pre-Pack’ is another form of Administration. The underlying business is sold to a third party or the existing management team. They create a new company using the old business’s assets and trade the new company without losing customers or jobs. Pre-Pack Administration is only an option if the administrator can show that it provides a better return for the company’s creditors than other options such as Liquidation.

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The main differences between Liquidation and Administration

There are some similarities between Liquidation and Administration. For example, you must appoint a licensed Insolvency Practitioner to manage the two procedures. However, there are also a few key differences.

  • Main objective – Liquidation closes a company while Administration aims to rescue it.
     
  • Trading position – Companies enter insolvent Liquidation when they are no longer viable and there’s no hope of turning them around. Administration is a procedure for businesses in severe financial distress but with a viable business model.
  • Debt repayment – In Liquidation, the business’s assets are sold to raise money to repay the creditors and the company is shut down. In Administration, the aim is to repay the company’s debts by restructuring it financially and operationally.
  • Employees – In Liquidation, the Insolvency Practitioner dismisses all the employees. Although some employees can be made redundant in Administration, they may continue working in a restructured business or for a new owner if the company is sold.
  • The role of directors – In both processes, the directors must assist the Insolvency Practitioner. However, at the end of Liquidation, the company no longer exists. In Administration, the directors can continue to control the company.
  • Duration – The Liquidation process lasts as long as it takes for the liquidator to sell the assets and wind down the business’s affairs. Administration, on the other hand, automatically ends after 12 months, although the administrator can ask for an extension.

Take our 60 Second Test to understand your options

There are three main ways to close a company in Scotland. Taking our 60 Second Test will help our advisers identify the correct route forward for you and your company.

While all three closure options have their advantages and disadvantages, the right one for you will depend on a number of factors including the current financial position of the company and your plans for the future.

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Can Administration end in Liquidation?

The primary aim of Administration is to save some or all of the company, but it can still end in Liquidation. That could be the case if the Insolvency Practitioner places the company into Administration before liquidating it to maximise the return for the creditors. For example, the liquidator could pursue a pre-pack sale so the old business can continue operating as a new company. They’ll then distribute the proceeds to the creditors and liquidate the old business. 

Company Administration could also end in Liquidation if the administrator cannot rescue, restructure or sell the business or if the company’s creditors do not accept the administrator’s proposals.

Is Administration or Liquidation right for my business?

That depends on the financial position of your business and your appetite for rescuing it and continuing to trade.

If you believe your business is viable but you are being threatened with legal action by a creditor such as HMRC, Administration could give you the time and space to turn the situation around.

Alternatively, if your financial issues are serious and longstanding, Liquidation is an effective way to end the creditor pressure and spiralling debt so you can move on to something new.

Need advice?

If you’re wondering whether Liquidation or Administration could be the answer to your financial struggles, we can help. We’ll take the time to understand your company’s position and guide you on your next steps. Get in touch for a free, same-day consultation or arrange an in-person meeting at one of our offices in Scotland.

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Contact the Scotland Liquidators Team

There are several options when it comes to closing a limited company and it is vitally important you choose the one which is right for you, your company, and your creditors. Whether you are struggling with rising costs, falling trade, or impatient creditors, we are here to help.

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