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.
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.
