Liquidation vs administration

What is the difference between liquidation and administration?

The difference between liquidation and administration is their purpose: administration is a rescue procedure in which a licensed insolvency practitioner tries to save the business or sell it as a going concern, while liquidation is a closure procedure in which a liquidator ends the company and sells its assets to repay creditors. Administration aims to keep a business alive; liquidation winds it up.

Both are formal procedures under the Insolvency Act 1986 and both are carried out by a licensed insolvency practitioner, so the choice is not about who runs it but about whether the business is worth saving. The table below compares the two across the questions directors ask most.

Both procedures review directors' conduct, so acting early is the best protection in either case.

Is an administrator the same as a liquidator?

An administrator and a liquidator are both licensed insolvency practitioners, but they do opposite jobs: an administrator tries to rescue the company or sell its business as a going concern, whereas a liquidator closes the company down and realises its assets to pay creditors. The title reflects the goal, not a different kind of professional.

In practice the same practitioner can act in either role depending on what the company needs, which is why the first question is always whether the business can be saved rather than which procedure to name first.

When is administration the right choice for a company?

Administration is the right choice when the underlying business is viable and worth saving, because appointing an administrator creates a statutory moratorium that stops creditor action and gives the business room to be rescued, restructured or sold as a going concern. It suits a company whose problem is debt rather than the business itself.

The features that make administration the better route are these.

• The moratorium. Appointing an administrator halts most creditor action, including a winding-up petition, giving the business protected breathing space.
• A going-concern sale. The business, its contracts and its jobs can be sold intact, which preserves far more value than a break-up.
• A route back. Administration can end with the company rescued, sold, or moved into a company voluntary arrangement so it keeps trading.
• A viable core. It works best where the trade would make money once the historic debt is dealt with. See our full guide to company administration and the wider company rescue options.

When is liquidation the right choice for a company?

Liquidation is the right choice when a company is insolvent and has no realistic future, because it closes the company in an orderly way, deals with creditors fairly, and draws a line under the situation so directors can move on. It is the correct route when there is no viable business left to rescue.

There are two liquidation routes, and which applies depends on how the process starts.

• A creditors' voluntary liquidation. The directors choose to close an insolvent company and appoint their own liquidator before creditors force the issue.
• A compulsory liquidation. A creditor petitions the court to wind the company up, and the court makes a winding-up order.
• No viable future. Liquidation fits where the business cannot pay its debts and continuing would only increase the loss to creditors.

Who gets paid first in a liquidation or administration?

In both liquidation and administration, creditors are paid in a set statutory order fixed by the Insolvency Act 1986, starting with fixed-charge secured creditors and ending with shareholders. The order decides who recovers money from a limited pot, and it is the same whichever procedure realises the assets.

The statutory order of priority is as follows.

• Fixed-charge secured creditors, paid first from the asset secured to them.
• The costs and expenses of the liquidation or administration.
• Ordinary preferential creditors, mainly employees for wages and holiday pay.
• Secondary preferential creditors, chiefly HMRC for VAT, PAYE and employee National Insurance.
• The prescribed part, a ring-fenced slice set aside for unsecured creditors.
• Floating-charge creditors, then unsecured creditors, and finally shareholders if anything remains.

Can administration lead to liquidation?

Yes, administration can lead to liquidation, because administration is a process with several possible exits and one of them is winding the company up once the administrator has done what can be done. A company often enters administration to protect and sell the business, then moves into liquidation to close the shell that remains.

The common exit routes from administration are a return to solvent trading, a sale of the business as a going concern, a company voluntary arrangement, or a move into a creditors' voluntary liquidation to distribute any remaining funds and dissolve the company. Administration and liquidation are therefore often two stages of one outcome, not rival choices.

How do you decide between liquidation and administration?

You decide between liquidation and administration by answering one question first: is the underlying business viable once its historic debt is dealt with? A viable business points to administration or another rescue route, while a business with no realistic future points to liquidation. Everything else follows from that honest assessment.

This is the judgement a licensed insolvency practitioner makes with you, looking at the cash flow, the order book, the creditors and whether the trade can pay its way in future. If you are not sure which side of the line your company falls, call us and we will tell you honestly, and point you to the wider rescue options if the business can be saved.

Why choose NTF to advise on liquidation or administration?

NTF Corporate Solutions is a boutique insolvency practice whose named practitioners, James Kaye and Nick Morgan, are licensed by the Institute of Chartered Accountants in England and Wales and can be appointed as liquidator or administrator. Because we act in both roles, our advice on which procedure fits is not steered towards one answer.

We have helped company directors since 2009, we explain the options in plain English, and the first conversation is free, confidential and without obligation. If you are weighing liquidation against administration, we will tell you which genuinely fits your company and why.