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What’s the difference between liquidation and administration?

The Quick Answer

Liquidation tends to be used to close a business that has stopped trading or is about to stop trading where there is no live business to save. The business has no future. It is a cheaper process.


The process of Administration tends to be used to:

a) Sell an ongoing larger business to a new owner or,
b) To allow a seamless pre-pack Administration sale to a new owner or,
c) Where the bank call in a secured loan if they have a debenture on the company. They will appoint their choice of Administrator.


To get into liquidation takes about two weeks but Administration can be a lot faster – it can happen on the same day with the purpose of protecting the business.

The answer in more detail

Liquidation is the more usual method to close an insolvent defunct company. It is cheaper than Administration and takes about two weeks.


To go into Administration, you have to be able to satisfy one of the three purposes as listed in Paragraph 3 of schedule B1 of the Insolvency Act 1986. These are:

a) To be able to recuse the business as a going concern or,
b) To achieve a better result for the creditors than if it just went into liquidation first (a typical example would be to protect a business whilst it is marketed and sold) or..
c) To realise the assets to pay a secured or preferential creditors (typically here the bank appoints an Administrator under this clause).

A comparison of Liquidation and Administration

AREA
LIQUIDATION
ADMINISTRATION

Fees and costs

Cheaper from about £3,000 plus.

Usually more expensive and time-intensive. Upwards of £10,000 plus.

Speed

It can be done in 14 days or less with 95% shareholder consent

Can be almost immediate

Is it a director’s decision?

Yes

Yes, it can be but will need a debenture holders’ consent if there is one. A debenture holder can also appoint as can a creditor applying to Court

Does it provide legal protection?

Not until the company is in liquidation

Yes and immediate relief from bailiffs, judgements and winding up

Can a creditor apply for this?

Only by going through a winding up process that takes three months

Yes, by application to the Court

Can assets be sold back to the directors?

Yes, as long as they pay market value or above. The sale to directors must be disclosed to creditors with reasons justifying why

Yes, usually by a pre-pack which must be fully disclosed to creditors justifying why

Do you need the Pre-pack Pool?

No

Yes, for a pre-pack

Do assets have to be advertised for sale after the insolvency date?

Yes, usually to justify a fair value has been achieved

Yes, but usually before the date of the pre-pack sale. Therefore most creditors only find out afterwards

When do creditors find out of the impending insolvency

They are given 7 days’ written notice of the liquidation

After the date of Administration and not usually beforehand

Do you need a Licensed Insolvency Practitioner?

Yes

Yes

Do employee rights transfer by TUPE?

No

Yes

Does the UK government fund pay out staff?

Yes

Yes unless there is a TUPE business transfer

Can a secured lender appoint the insolvency practitioner?

Not usually in liquidation

Yes

If you still have a question after reading the above, please just send me an email – my email address is on the top of the home page and below. 

Author: David Kirk
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David Kirk ACA FABRP

Just a quick email to say a heartfelt thank you for your very calm, considered, expert advice regarding my circumstances on Tuesday. Things looked bleak before you explained my options much more clearly, in simple layman’s terms.
Rob Elliott (14th December 2021)

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David Kirk

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