Company insolvency is not an easy situation to deal with; what’s also a difficult decision is deciding which route to take to resolve the situation. Is it better to liquidate the company and use its assets to pay back creditors? Alternatively, if the company is worth saving, is administration a better option to give your insolvency service time to source a buyer for the business?
Making a choice between liquidation vs administration is always a decision that should be discussed with your insolvency practitioner who will be able to give you an unbiased opinion. But understanding the two options and what they involve will help you.
What is Liquidation?
When a company is insolvent and can’t pay its creditors, liquidating the company is often the only solution remaining. A liquidation process means that the company’s assets are sold and the proceeds are used to pay back the company’s creditors.
The company is closed down and is no longer allowed to trade and whilst the company remains on the Companies House register, its status is changed to ‘liquidation’; unless the liquidator (the insolvency practitioner handling the liquidation process) applies to have the company removed from the register.
There are three forms of liquidation:
- Creditors’ Voluntary Liquidation (CVL) – is a legal process where an insolvent company’s assets are sold to pay back its creditors and the business is closed.
- Compulsory Liquidation – is when an insolvent company’s creditors have applied to the court to force the business into liquidation.
- Members’ Voluntary Liquidation (MVL) – although this is a liquidation process, it is only for a solvent company that is being legally closed for a specific reason.
The pros and cons of Liquidation
There are advantages and disadvantages to liquidation:
- The liquidation process is managed by the liquidator who takes over the company during the process.
- Legal action by creditors, including winding-up petitions or appointment of a bailiff, is stopped.
- It is a cost-effective option to closing a company.
- Creditors are paid back using the proceeds from the sale of assets and those that are not covered are written off, including any government bounce back loans of CBILS.
- Directors have the option to purchase any of the company’s assets, including the company name, equipment and premises, but this must be at market value.
- No redundancy or restructuring costs are involved.
- It is an efficient process and can be completed within a few months.
The disadvantages are:
- The interest of the creditors is always the top priority.
- The IP must investigate the directors’ of the company to ensure there was no unethical or illegal behaviour, and this is reported to the courts.
- There is no going back from liquidation; the company is closed completely and is no longer allowed to trade.
- Any personal guarantees made by directors are their responsibility and must still be paid by them. This could involve a creditor taking the director to court personally.
What is administration?
Company administration can be a more favourable option to liquidation. The appointed Administrator takes over the running of the business on behalf of the creditors, placing a moratorium on the company in order to freeze any potential legal actions.
The Administrator can be appointed by the directors, the company itself or creditors and the legal process is more likely to generate a better return for creditors through the sale of the company’s assets. The aim of the administrator is to source a new buyer for the company, not only saving the company from liquidation but also the jobs of the company’s employees, or arrange a pre-packaged sale of the company’s assets.
The pros and cons of administration
There are advantages and disadvantages to administration. The advantages are:
- The best option for creditors – generally, administrators often realise more in the sale of assets than they would in a liquidation process, either due to the company being allowed to continue to trade or through a pre-packaged which retains a better value of the assets.
- Automatic moratorium – administration is the only legal insolvency process that invokes an automatic moratorium. This prevents the insolvent company’s creditors from taking any further legal action. That said, creditors are entitled to ask permission from the court or the administrator to proceed with legal action, but it is not usually granted as it would stop the administrator’s purpose.
- Company voluntary arrangements – a possible exit route from the administration process is to agree on a voluntary arrangement with creditors, and is often a preferred choice.
- Pre-packaged sales – the value of the company’s assets is likely to be better retained, raising more funds to pay back creditors.
- Potential for restructuring – offers the company an option to commence a business recovery process, like restructuring.
- Opportunity for company survival – administration gives the company the opportunity to continue trading and surviving rather than being closed.
The disadvantages are:
- The cost – the administrator’s role is more involved and long-standing than it would be in a liquidation process and together with the pre-packaged sales, the costs can be a lot higher than liquidation.
- Directors lose control – the administrator takes complete control of the company because they are appointed by the court. Directors are not allowed to work with the administrator, even in arranging a voluntary agreement with creditors, nor if the administrator looks to sell the business.
- Conduct investigation – a large part of the administrator’s role is to investigate the company’s affairs over the previous three years of trading.
- Negative publicity – as with any liquidation process, it is advertised in The Gazette which may have implications on the company’s reputation, its relationships with existing suppliers, customer confidence and ultimately how it continues trading.
The company’s circumstances and the insolvency practitioner’s advice will have a strong bearing on whether liquidation or administration is the best option.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.
