Creditors’ voluntary liquidation vs administration – what is the difference, and which one is right for your organisation? At BRI Business Recovery and Insolvency, we help clients who are facing financial difficulty by considering and explaining the various options available. When our clients first come to us, they often aren’t sure of the difference between these terms, which is not uncommon.
We’ve created this insight to shine more light on these technical terms. If you require financial advice, contact us today.
Creditors Voluntary Liquidation vs Administration – Similarities
A creditors’ voluntary liquidation (“CVL”) and an administration are both formal insolvency processes which form part of an insolvency practitioner’s “toolkit” when advising companies that are in financial distress.
In both processes, the same tests are used to determine whether a company is insolvent:
- The “cash flow test” – a company cannot meet its liabilities as and when they fall due
- The “balance sheet test” – a company’s liabilities (including any contingent liabilities) exceed the market (or “fair”) value of its assets.
Creditors Voluntary Liquidation vs Administration – appointing a liquidator or administrator?
This is where the two processes begin to differ. In a CVL, the directors and members are in control of this insolvency process. With requisite voting by members, a company is placed into CVL. Creditors then have the option to either ratify the members’ choice of liquidator or to appoint a different insolvency practitioner to deal with the liquidation. Notice of this liquidation process has to be provided to both members and creditors, albeit there is a mechanism for members to consent to a shorter notice period.
In contrast, an administration could involve a court hearing or the filing of prescribed documents (outside of working hours) to a court.
The following parties can make an application to court (typically with assistance from a specialist insolvency solicitor) for an administration order:
- A creditor (or more than one creditor) of the company concerned
- The company’s directors
- The company itself
- A liquidator
- A supervisor of a company’s voluntary arrangement
- Under other statutory legislation (rarely used)
The filing of prescribed documents (normally by a specialist insolvency solicitor) may be commenced by:
- The company’s directors
- The company itself
- A “qualified floating charge holder” (often a bank or commercial lender) that meets relevant statutory requirements
In an administration, an appointment can be made quickly, thus protecting a company from actions being taken by its creditors. Effectively, creditors can also be prevented from taking action in the period leading up to appointment if a Notice of Intention to Appoint Administrators is filed in court.
Liquidator vs administrator key objectives
Liquidators and administrators have different key objectives which can alter the outcome of our process.
Relevant sections of the Insolvency Act 1986 set out the statutory objectives of an administrator, which are prioritised as follows:
- Rescuing the company as a going concern
- Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up
Realising property in order to make a distribution to one or more secured or preferential creditors
Arguably, the most important duties of a liquidator (as far as creditors are concerned) are:
- To realise the company’s assets
- To make a distribution to creditors in the required order of priority
In an administration, court approval is required to make a distribution to unsecured creditors, except for a scenario where reserved fund have been set aside out of floating charge assets. Alternatively, the appointed administrator can place the company into CVL to make this distribution without requiring sanction from the court.
What is a “pre-pack” administration?
If you have been considering administration as a solution for your company, you may have looked into a “pre-pack” administration.
In this case, a sale and purchase agreement for the company’s assets is drafted and agreed in principle before the administration goes ahead. This is either with a new company (potentially with common directors and shareholders) or to a separate company altogether. The sale often completes the day of appointment. This often protects the core business, including preserving jobs.
Administrator or Liquidator – how long will the insolvency practitioner likely be in office?
An administrator has an initial finite period of one year. With the approval of creditors, this can be extended by one further year. Any further extension requires approval by the court.
Whilst there is no statutory restrictions on the length of a CVL, insolvency practitioners are expected to progress and close cases within a reasonable timeframe by their respective licensing bodies.
Liquidation vs Administration – what happens on completion?
In a CVL, the liquidator drafts their proposed final account and, assuming that there are no objections, the final report is issued to Companies House around eight weeks later. Companies House will then dissolve the company approximately three months’ following receipt.
In an administration, there are a number of different exit routes, including:
- Compulsory liquidation
- Creditors’ voluntary liquidation
- Company voluntary arrangement
- Dissolution of the company
What documentation do creditors receive during a Liquidation or Administration?
Creditors receive initial documentation within one month of appointment and annual progress reports thereafter. Once all matters are dealt with, a liquidator issues their final account.
An administrator will draft and circulate their “Proposals” within the first eight weeks of appointment. In the case of a pre-pack administration the administrator must comply with the Statement of Insolvency Practice, SIP 16and circulate details of the pre-pack sale within two weeks. Progress reports are then issued at six monthly intervals.
What is the difference in costs for these procedures?
Due to the reporting requirements and their complexity, administrations tend to be significantly more expensive than a CVL, partly due to increased reporting requirements and complexity. In addition to meeting one of the statutory objectives, there has to be a good reason for choosing this more expensive option. In an administration, the appointment documents tend to be drafted by lawyers, and there is often a sale of a company’s assets, which means that professional fees (including legal and agent’s fees) can also be much higher. For these reasons, a pre-pack administration tends to be costly.
Creditors Voluntary Liquidation vs Administration: How do I choose the right option for my company?
Depending on the situation of your business, you will be better suited to either a CVL or an Administration. If you are looking for professional advice and mindful of duties as a director, BRI will always run through the options available to you, the estimated cost for each process and how these impact the directors and members of a company. Contact our team today. Our initial meeting will be free of charge with no obligation.