Administration or Liquidation?
Differences between Administration and Liquidation
Many non-professionals and at times even company officials are unsure about the differences that exist between administration and liquidation. We attempt to understand the two, and how they could be of use to business:
Administration involves the process of building a boundary around a business that is insolvent to protect against any threats from creditors. Once it is determined that the business is viable with the possibility of its balance sheet returning to profitability, the insolvent practitioner builds a timeline for the management and works on creating restructuring procedures to improve the business’ situation.
Administration and insolvency are official insolvency procedures. The vital difference is if they succeed the business officials can help to recover the business completely. This involves debt repayment, restructuring, and continuing with business as usual to avoid insolvency.
The procedure involves shutting down any business with major debts. It entails the sale of all the assets of the business, its dissolution, and needs an insolvency practitioner. Once the company management is aware of the impending insolvency, they must get in touch with an insolvency practitioner at the earliest. The business responsibility shifts from the shareholders to creditors. In summation, whenever a business becomes insolvent with repayment of debts not feasible, liquidation is the ideal choice.
Aims: While Administration and Liquidation adopt a different process for insolvency, the common factor is curtailing any further loss to creditors and the business.
After Administration is liquidation possible?
While liquidation is a possibility after administration, other options also could result from the latter.
Pre-Pack Administration: This is a legal process of selling the company to the company’s management under a new identity or a third party with a new business name. In certain situations, if assets, existing contracts, and funds are available of the business they are then transferred on sale to the new business entity.
Finance: For any business that is facing financial hardships there are some funding options available to bail them out. Despite that, subject to the business situation the management officials might decide that liquidation would be the best choice for the company.
Could the Administration provide a lifeline to prevent Liquidation?
While it mostly is the norm for Administration to lead to Liquidation, the former can also prove to be beneficial to avoid liquidation. Agreeing to administration comes with benefits like not being held personally liable or facing accusations of wrongful trading. Probably the biggest benefit is the stoppage of all legal action against the business during the period of administration. Once the administration order is published, an administrator in the form of an insolvency practitioner is formally appointed who handles all day-to-day working of the business. During this period, the administrator is legally bound to work for the benefit of creditors of the business. If feasible, a recovery blueprint is created before it is presented to the creditors at a meeting. When the administration keeps the creditors well being in mind and at the same time allows the business to continue operations, despite the insolvency, the business can reap benefits.
If you need help with companies that have become insolvent or need our debt collection services please contact us.