Jonathan Munnery
Insolvency & Restructuring Expert
If a company director reaches a crossroads where they must decide what direction to take the business in, company liquidation and company administration may well be two routes considered by the director.
There are a wide range of circumstances under which company liquidation and administration may be considered, both of which a licensed insolvency practitioner can expertly advise on.
Jonathan Munnery, a company liquidation specialist at UK Liquidators, looks at these factors in detail, including why solvent company liquidation is often weighed as an alternative to a business sale.
What’s the difference between company liquidation and administration?
Company liquidation is a route through which company directors can efficiently close a company, while company administration is a rescue tool that involves restructuring a company to restore profitability.
What is company liquidation?
Company liquidation is a formal insolvency procedure used to voluntarily close an insolvent limited company, initiated by a licensed insolvency practitioner who takes on the role of liquidator.
There are two types of company liquidation – solvent liquidation which takes the route of a Members’ Voluntary Liquidation (MVL) and insolvent liquidation which takes the route of a Creditors’ Voluntary Liquidation (CVL).
A Members’ Voluntary Liquidation is a formal liquidation procedure for solvent companies with substantial funds to extract. It’s a highly tax efficient exit route for profitable companies that must come to an end due to a range of reasons, such as retirement, as demand for the business has expired or due to changing market conditions.
This is a popular route for exiting company directors due to the associated tax treatment and additional tax relief available, if eligible.
A Creditors’ Voluntary Liquidation is a liquidation path for company directors that wish to voluntary close an insolvent company. A CVL allows company directors to formally and strategically close a limited company through a licensed insolvency practitioner.
What is company administration?
Company administration is a formal rescue procedure for businesses in financial distress with real rescue potential. While a company is in administration, the appointed insolvency practitioner, also known as the liquidator, will take control of company affairs to rescue viable parts of the business.
While a company is in administration, it is protected from creditor action by way of a moratorium. This provides the company director with breathing space and sufficient time to take stock of the financial position of the business and devise a rescue plan.
The administrator will set out to generate the best return for creditors and return the business to a position of strength.
A company will eventually exit administration, after which it may enter a formal recovery process, enter company liquidation or be sold to a connected or unconnected party.
How to choose between company liquidation and administration
The financial health of the business and rescue potential will ultimately determine whether company liquidation or administration is suitable. If there’s no possibility or appetite for company rescue, the company liquidation route may be considered to bring the business to an end.
If there’s a possibility that placing the company under the control of a licensed insolvency practitioner through the company administration route can generate the best returns for creditors, this route will be considered.
An alternative to a business sale
A solvent liquidation may be considered an alternative to a business sale if the company director wishes to bring the business to an end. Changes to trading conditions, tax legislation and consumer appetite may contribute to this decision and outweigh the selling points of the business sale route.
If the business continues to serve a loyal customer base and the services are in demand, a business sale may be considered as an alternative route out of the business.