Liquidation or Administration: What is the right option for closing your company?

Liquidation and administration are both official procedures designed to assist insolvent companies but their aims and outcomes are fundamentally different. Liquidation leads to the permanent closure of a non-viable company following the sale of its assets.

The aim of company administration, on the other hand, is to save the business from liquidation or at a minimum, to provide creditors with a better outcome than if the company was liquidated.

Liquidation is a way to close your company whether it’s solvent or insolvent. Solvency means that it’s sufficiently healthy financially to pay all of its liabilities. When comparing liquidation and administration, however, we need to look at the situation from the perspective of an insolvent company.

Although there are two types of insolvent liquidation, Creditors’ Voluntary Liquidation and compulsory liquidation, the only appropriate way to close a company in this situation is via CVL.

Given its untenable financial situation and your legal duty to prioritise creditors’ interests, voluntary liquidation also protects you and other directors from damaging allegations of misconduct or wrongful trading as you’ve proactively sought to limit further losses.

Administration is another official insolvency process but it can be used to rescue a company. Although entering administration may ultimately lead to liquidation in some cases, the principal aim of the procedure is to help a business recover and return to profitability.

Entering this process triggers an eight-week moratorium on creditor legal action, which protects the business from compulsory winding up and offers the time needed to plan a way forward.

The three aims of administration are to:

• Rescue the company as a going concern
• Achieve a better result for creditors as a whole than would be likely if the company was liquidated without entering administration
• Realise property so that a distribution can be made to one or more secured or preferential creditors

As administration isn’t a definitive closure method, even though it can result in company closure in some instances, it’s not the right option to close your company if there’s a chance that it could be rescued from insolvency.

Company administration offers various routes towards rescue and recovery, which is its main goal. An administrator might decide that restructuring debt is the best way to achieve this, for example, or perhaps by cutting costs and streamlining business operations.

Company Closure can provide more professional advice on closing your company and has extensive industry-wide experience in guiding directors towards the most suitable method. Please contact one of the team to arrange a free, same-day consultation if your business is in financial distress – we operate a nationwide network of UK offices.