Difference between liquidation and administration

As a business owner and as an adviser to business owners, understanding the differences between liquidation and administration is necessary in order to make informed decisions regarding your business at a time when it might be, or is heading towards being, insolvent.

Both terms refer to types of insolvency appointment, but they have different implications for you and your business.

This article outlines the key differences between the two processes, including their legal implications and potential outcomes. Read on to gain a better understanding of which option may be most suitable for your specific situation.

What is Liquidation?

Liquidation is a process by which a company's 'life' is brought to an end - think of it as financial palliative care. A liquidator is appointed to take control of the company, and its assets are sold off to create a pool of funds to pay its debts. This process can occur voluntarily or involuntarily. In a voluntary liquidation, the company's directors and shareholders decide to wind up the business because it is no longer viable or needed. In involuntary liquidation, a Court orders the company to be wound up (usually on the application of a creditor) because the company is unable to pay its debts.

In either case, a liquidator is appointed to oversee the sale of the company's assets. The proceeds from the sale are used to pay off creditors in order of priority. Any remaining funds are distributed among the shareholders. It is generally not the case that the company's business continues in any form and if it does, that continuation is generally very brief - enough time to vacate a business premises or similar. The liquidator is also required to investigate the affairs of the company and to provide a report to the company's creditors about why the company failed, who (if anyone) might be responsible for that failure, what the liquidator might intend to do about that and, ultimately, how much money might be returned to creditors. It is a methodical process that takes between about 6 and 18 months to complete (depending on complexity). Some liquidations run for quite a long time.

Once the liquidation process is complete, the company is deregistered by the Australian Securities and Investments Commission and it's life is at an end - it ceases to exist.

What is Administration and why is it different?

Administration is a voluntary (but in rare circumstances involuntary) process by which an administrator is appointed to take control of a company's affairs and manage them, with a view of conducting a rapid investigation to report to creditors on what he or she believes is the course of action likely to allow creditors to recover the most of what they are owed. Administration can, and often does, involve the ongoing trading of the company's business. The creditors then get to decide, at a meeting held within about a month of the administrator's appointment, on what they choose the future of the Company to be. Thus, administration is a stepping stone to the ultimate outcome, rather than an end stage appointment itself. Why is it important to understand this? Because administration is not the end of a company - in fact far from it. Used properly, administration can lead to some beneficial outcomes not only for creditors, but for the company too. Let's explore that a bit more.

So, unlike liquidation, administration does not necessarily mean the end of the company. If the administrator is able to see a pathway through a temporary insolvency event that, once addressed (perhaps with replacement funding, renegotiated contractual arrangements or an underwriting of the company's financial position by a third party), the company may be able to continue trading and can, in some circumstances, be returned to the directors' control as solvent. This is the first and rarest of the outcomes from an administration. In my 20-plus years of practice, I have seen this happen only once.

If there is a possibility to restructure the affairs of the company, by say changing the underlying structure to promote efficiency, removing unprofitable elements, introducing new capital or even negotiating a sale of some or all of the business, it may be possible for a deal to be put together that, whilst not paying creditors all of what they are owed, gets them more than they would get if the company went into liquidation. This 'deal' is called a Deed of Company Arrangement, or DOCA for short. Spend enough time around insolvency practitioners and you'll certainly hear about the magic of DOCA's. Why? Because a DOCA has the capacity to include almost any type of corporate rearrangement you could imagine - it is a very flexible structure in which there can be different outcomes agreed for different creditor classes, the reordering of priorities of payments, the changing of contractual obligations, the changing of shareholdings... the list goes on. So when the media (irresponsibly) says a company has 'collapsed' into administration, that is simply a dramatic description of an event that often bear little to no comparison to the word collapse - maybe a better description is that the company has sought the 'refuge' of administration to give it some breathing room to work out what it might do next. So a DOCA is the second of the solutions that creditors might choose.

Finally, if neither a return of the company to its directors or a DOCA is possible, the third and final course of action arising from an administration is liquidation. This is why administration is sometimes referred to as a 'halfway house', because it can be a stepping stone to liquidation. Some practitioners might even suggest to you that it is a defacto (read: easier) way of getting a company into liquidation. You'll recall from above that a voluntary liquidation requires the consent of directors and shareholders. An administration simply requires the approval of a majority of directors. See where this is going? If there are different directors from shareholders and the two groups don't see eye to eye, it is possible to place a company into administration without the consent of shareholders - in fact shareholders are not involved in the conversation at all so far as administration goes. If done for the right reasons, this can be a useful way of resolving disputes arising in an insolvent (or soon to be insolvent) company.

Key Takeaways

The key takeaways about the differences between liquidation and administration are set out below:

in Conclusion

As a business owner or as an adviser to business, it is important to understand the difference between liquidation and administration. Liquidation is a terminal process by which a company's assets are sold off to pay its debts and the company's affairs (and life) are brought to an end. Administration is a process by which a hold is placed on the actions of creditors whilst an Administrator works through a process designed to identify an outcome that is in the best interests of the creditors. The key difference is that liquidation is a terminal process, while administration is not necessarily so. It is important to seek professional advice if you are facing financial difficulties in your business.

Seeking Help? Contact Beacon Advisory Today!

If you're a business owner struggling with insolvency, or an adviser seeking more information to assist a client, it can be a daunting and overwhelming experience. However, there is hope! With the right guidance and support, you can navigate through this difficult time and come out on the other side stronger than ever before.

That's where Beacon Advisory comes in. Our team of experienced professionals specialises in helping businesses just like yours overcome financial challenges and emerge from insolvency with a solid plan for the future.

Whether you need help negotiating with creditors, restructuring your business model, or simply navigating the complex legal landscape of insolvency, we're here to provide the guidance and support you need.

Don't let insolvency bring your business down. Contact Beacon Advisory today to learn more about how we can help you get back on track and achieve long-term success.

Disclaimer:

This article is not intended to provide professional or legal advice but rather general information only. You cannot rely on the content of this article without proper advice in the context of your own circumstances. If you have specific concerns, please consult a professional who can provide advice tailored to your individual circumstances.