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Difference between liquidation and administration

After running into financial difficulties in 2017, Carillion has gone into liquidation. While often bandied around in the news, it’s not a term you’ll find explained, which has left some to ponder the difference between words such as liquidation and administration. 
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Aren’t they the same? To some degree, yes. There is one crucial aspect that connects liquidation and administration: insolvency.

It’s a state in which a business can no longer pay its debts. In the case of Carillion, debts were close to £1bn and its pension deficit stood at £600m. These issues, as the Financial Times put it, “far outweighed its equity value.”

Liquidation and administration are means to paying off such debts. But the two processes spell a different fate for the company.

Administration: Taking a gamble

Numerous companies entered administration in 2017. Monarch Airlines joined the club after failing to renew its Air Travel Organiser’s Licence, while Palmer & Harvey struggled due to a takeover bid falling through.

Both companies have seen legal ownership pass to a court-appointed administrator – someone who is a licensed insolvency practitioner. The appointment leads to a temporary stasis, if you like. During this time, legal action against the business by creditors is prevented.

Said administrator will attempt to restore the company’s viability by finding buyers for its assets. They will either use the finances obtained to repay creditors or will seek to come to a different arrangement with them. Saving at least part of the business is the primary goal – normally in a time frame specified by the court.

Of course, going into administration doesn’t always mean a happy ending for a business. Sometimes, if a company’s financial situation is beyond help, the administrator will pursue green-light the liquidation process.

Liquidation: When you cease to trade

Liquidation differs in that all assets are sold in the effort of repaying accumulated debts. In essence, the company ceases to trade. It will cease to exist on Companies House – a process otherwise known as being “struck off”.

One of the biggest differences between liquidation and administration is that the latter can be implemented while the business is solvent. Those who merely wish to stop trading, for whatever the reason, can start a process known as members’ voluntary liquidation.

It can also be inflicted by the court straight off the bat if there is deemed to be no value. This was the fate of Carillion. Likewise, directors may petition for the move when the company enters insolvency, which will take effect once accepted by the court.

In all these cases, a liquidator will be appointed to ensure business transactions are closed, debts are settled and that the remaining share capital is distributed between shareholders.

Carillion: Why liquidation rather than administration?

The Financial Times’ Matthew Vincent pointed out that the company’s assets were simply not worth buying. He said: “All it had was contracts, on which margins were evidently too low to cover its growing liabilities. Even if Carillion’s contracts could be thought of as assets, they were too complex or insufficiently valuable for banks to lend against.”

He further suggested that the outsourced projects Carillion recently undertook, were just too complicated for administrators “to unpick”. That, and it had come to the point where any new money was used to cover debts. The only thing left to do was liquidise its assets into cash to pay what creditors were due.

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About Author

Shané Schutte

Shané Schutte is the deputy editor of Real Business, with a particular specialism in employment and business law, human resources, information technology and sales/marketing.

Real Business