With Carillion’s failure hitting the headlines recently it has again been proved that no entity is too big to fail. When such failures occur the terms administration and liquidation are often used interchangeably and wrongly regarded as being synonymous. However, the two terms are distinctly separate insolvency processes both in their ultimate objective and implementation.
When a company is put into administration it is with an intention to rescue and recover its business in order to avoid insolvency. Administration halts any further legal action against a company which is struggling to meet its debts. An appointed administrator can realise value to meet those debts by selling the whole or part of the business and its assets. The business continues to operate as usual during the administration process so there is as little disruption to trade as possible to save jobs and realise better value for any trade creditors.
If a company is facing financial difficulties then the directors may consider putting it into administration in an attempt to save the business. If administration fails then liquidation may follow.
Liquidation on the other hand is the method used to realise a company’s assets prior to closing it down. Liquidation can be triggered compulsorily by a court or voluntarily by the members’ or creditors’ of the company. All the assets of the company will be sold and the company will be closed by distributing the funds available to creditors and shareholders.
For a business facing financial difficulty administration is preferential if the objective is to save the underlying business. However, this isn’t always the chosen route, Carillion went straight into liquidation instead of starting the administration process as it could not reach a deal with its various financiers. The competing interests of such a large company would have made it rather difficult to operate the business during an administration period. Interestingly questions are being raised as to whether the low margin contracts Carillion had with the government constituted a saleable business or not.
If you are a business facing financial difficulties and considering the option of winding up, then you may want to understand the value of your underlying business with a qualified insolvency practitioner to assess whether administration or liquidation is an appropriate way forward to maximise return for you and your creditors.