The difference between insolvency and administration

Liquidation and Administration are two entirely different procedures, but nevertheless, it’s a question that pops up quite frequently. We address the main differences and whether Administration is the best route to take with examples of companies that have succeeded and failed after Administration.

Liquidation is a procedure that’s undertaken when a company has come to the end of its life. Any assets are sold off (or liquidated) and the proceedings are used to repay creditors. The primary goal of calling in the Administrators is to help a company pay off its debts and avoid liquidation.


When to consider administration

If a company repeatedly fails to pay its debts on time, there is the threat of being forced into compulsory liquidation. In these circumstances, Administration can be a favourable alternative. Entering into Administration with the aid of a licensed practitioner can give you the time needed to negotiate with creditors and arrange the terms to pay off creditors.

Is Administration the right procedure to take?

As discussed above, Administration can result in liquidation, but not always. The main advantage of this Administration is that any legal action against your company is frozen during the process. During this time, an Administrator is appointed and takes full control over the business operations with a legal obligation to act in the best interest of the creditors. The Administrator will outline a recovery plan which involves repaying as many debts as possible and identifying any opportunities that can save money with the goal of saving the company.

Within ten weeks of entering into Administration, a creditors’ meeting will be held – either in person or via other correspondence. The goal of these meetings is to outline the new administrative proposals. If the company has very few assets, poor cashflow or other factors that would suggest a low chance of recovery, it may be that the practitioner recommends voluntary liquidation instead.

Does Administration always result in Liquidation

Administration can be a lengthy process and the unfortunate reality is that in England and Wales, two-thirds of companies that go into Administration fail (Company Watch 2016). The graph below takes into account 4581 Administrations that occurred between 2012 and 2016. Of that total, 1947 are still in progress. From the remaining 2607, 2344 cases resulted in the company being either dissolved or liquidated. This leaves only 263 companies that remain active. Of the failed companies, it’s estimated that 513 Administrations involved the rescue and long-term survival of the business through a Pre-pack sale, which when added together, results in roughly 30% of the sample companies having a successful outcome.

insolvency vs administration

High profile businesses such as Blockbuster and Comet are examples of those that did not survive Administration. Ultimately if a company can no longer compete or does not adapt to the changing market environment, it’s unlikely that the process will be successful. In the case of Blockbusters – they failed to fully appreciate the threat of online competitors and the consumer shift to digital streaming alternatives.

Consumer confidence can also have a significant impact on the failure or success of Administration. The very act of going down this route can affect consumer confidence. In the case of Comet, consumers were less likely to buy high-value goods for fear that they would not be able to return faulty goods if the company closed as a result. This along with other factors led to the liquidation and the closure of their 236 stores.

Under certain circumstances, companies can survive the process if the right deals are made. Dwindling sales of physical CDs due to increased competition in the online space forced HMV to enter into Administration in January 2013. Administrators drastically restructured the company; reducing costs and negotiating better prices from creditors. By focusing on what HMV could offer that online retailers like Amazon could not, HMV was able to remain competitive and lucrative enough to find a buyer (Hilco UK) who took them out of Administration in April 2013.

Different Outcomes of Administration

Administration often in ends one of four ways depending on the findings.

  • CVA – Often the most favourable outcome, the Administrator works with the directors to draw up a plan for company voluntary arrangement. If the creditors agree to this, the company is handed back to the directors who continue to trade.
  • Pre-pack Administration – The insolvency practitioner prepares the business and its assets for a sale to a new owner. Most things are agreed in advance of the formal insolvency.
  • Liquidation – If agreements are not met and debts still to pay after Administration, the company will enter into liquidation and come to an end
  • Dissolution – dissolution negates the need to enter into liquidation and usually happens if the company has no money to pay off creditors or no assets to sell.

 

If you think that Administration could be the right procedure to take, or if you are facing liquidation, talk to one of our business rescue experts. We can arrange a call or a meeting to discuss the various options available.

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