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What is the Difference between Administration and Liquidation?

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With all the laws governing insolvency in the UK it is common to hear the question posed, "What is the difference between administration and liquidation?" This is probably because of all the reports of administrative orders that make the daily papers when large corporations are on the brink of insolvency. You will rarely hear anyone ask, "What does liquidation mean?" because it is self explanatory and often used synonymously with the winding up of a business. In other words a liquidation definition could simply be 'winding up a business.' It can be compulsory (court ordered) or voluntary, but it always results in the winding up of a business.

Administration, on the other hand, does not need to result in the winding up or liquidation of a business. An administrator is appointed by the court, creditors or the company itself. Furthermore, the administrator takes on a broad scope of duties and literally takes over those duties which were previously held by directors. He or she sees to the operation of the company in order to comply with the administrative order of the court. It may be to liquidate the company and it may also be to turn financial matters around within a given timeframe, usually 12 months, in order to bring it back to being solvent.

So then, what is liquidation and how is it different from administration? In terms of a simple definition, liquidation is the winding up of a business that will cease operations while administration is the appointment of an administrator who may or may not seek liquidation. Liquidation can be sought even when a business is solvent but administration is ordered when the company is insolvent. Liquidation is the final phase of a business but administration may be an interim phase intended to bring the company back to solvency.

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