Both are governed by the Insolvency Act. This being said, the processes are very different and each only applicable in certain circumstances. The two are often confused — This page outlines the two processes by explaining their definition as well as exploring some of the main differences between them.
Administration involves appointing a licensed insolvency practitioner to a company as it becomes insolvent and can no longer pay its debts. Administrators take over and run the company, taking necessary action to repay creditors. A restructuring and recovery plan is made and implemented and a moratorium is put around the company, whereby they are protected from any legal action during this period.
The administrator assesses the companies' viability. The process is temporary and not long term — it runs for typically a year, unless courts and creditors allow this to be extended. Administrators must adhere to the following statutory purposes for their role: So the aims of administration are the following;. After 14 days of entering administration, employment contracts of the company are taken on by the administrators. Hence, it is favourable for the company to be sold out of administration before this date.
Overall, the idea of administration is to try and prevent the company from having to enter liquidation in the first place. It tries to turnaround and rescue a company. However, administrators are duty bound to always act in the best interest of the creditors.
Liquidation is the process of selling off or realising company assets in return for funds, from which pay the creditors. Usually this happens after the company has stopped trading. This is quite different to companies in administration or companies facing liquidation. In fact, the company may well survive and succeed after the receivership ends with responsibility handed back to the company directors.
It should also be noted that it is fairly common for an administrator or liquidator to be appointed to represent unsecured creditors when a company enters into receivership. This can create additional challenges for a company seeking to return to trading.
For more information, view our receivership FAQ. A good way to understand administration is to consider it as a point where your company may still be saved. Administration is a stage where your company might be close to being insolvent, or is already trading insolvent. A resolution of the company directors is typically how an administrator is appointed.
They can also be appointed by a liquidator, creditor, or court. The administrator will compile a report that addresses key areas of the company including financial circumstances, management or affairs, and processes. These finding will be reported to creditors and accompanied by a list of recommendations. They are also responsible for reporting any offences they find to ASIC. Voluntary administration usually results in two outcomes: entering a deed of company arrangement DOCA or liquidation.
The first option, the DOCA, is effected by a formal agreement between the creditors and the company to administer the company in a certain way. Depending on the agreement, the path forward might be continued trading, directors and other parties contributing funds or releasing claims, debt refinancing, or sale of assets.
The Difference Between Liquidation and Administration. Updated: 8th November What is the difference between liquidation and administration? We explain what business rescue options are available to you as the business owner, and it is you as the director who stays in control and decides what route to take. It makes no sense for our client directors to feel pressured into something that they believe does not favour their companies and all stakeholders.
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