There are distinct differences between the administration and liquidation of a company, including their impact on creditors’ rights to pursue outstanding debts through the courts.
ADMINISTRATION
Administration occurs when a company is insolvent, meaning it cannot pay its debts as they fall due. An independent administrator is appointed to investigate the company’s affairs, including its finances, management, and internal processes. The administrator’s role is to assess all possible courses of action and determine the best way forward for the company and its creditors.
How administration is initiated
Administration can be initiated by the company’s directors or its creditors.
Key steps in administration
- The administrator notifies all known creditors of their appointment.
- Within 8 days, an initial meeting of creditors is held.
- The administrator investigates the company and prepares a report for creditors, usually within 20 days.
- At a second meeting, creditors vote on the company’s future, with options typically including:
- Entering into a Deed of Company Arrangement (DOCA) outlining how debts will be resolved.
- Placing the company into liquidation, where its assets are sold to repay debts.
- Returning control of the company to its directors to attempt to trade out of insolvency.
Impact on court proceedings
While a company is in administration, creditors are prevented from initiating or continuing legal proceedings to recover debts. This “moratorium” provides the administrator with time to assess and implement a strategy without the threat of legal action disrupting the process.
LIQUIDATION
Liquidation, on the other hand, is the process of winding up a company’s affairs. This occurs when a company is insolvent, and no viable path exists to restructure or trade out of its financial difficulties. A liquidator is appointed to take control of the company, sell its assets, and distribute the proceeds to creditors in a legally prescribed order.
How liquidation is initiated
Liquidation can follow a failed administration. It can also occur directly through a court order or voluntarily by the company’s directors and shareholders.
Key steps in liquidation
A simplistic overview of the liquidation process is as follows:
- The liquidator takes control of and investigates the company’s affairs and any potential breaches by directors.
- Available assets are identified, called in, and disposed of.
- Proceeds, if any, are distributed to creditors based on their priority ranking.
- Once all assets are distributed, the company is deregistered and ceases to exist.
Impact on court proceedings
When a company enters liquidation, creditors generally cannot pursue the company through court proceedings to recover debts unless they have the liquidator or court’s consent. If that consent is not provided, a creditor must lodge a claim with the liquidator, who determines the validity and priority of claims. Existing legal proceedings against the company are typically stayed (paused) or discontinued, depending on the circumstances.
SUMMARY OF KEY DIFFERENCES AND IMPLICATIONS
| Aspect | Administration | Liquidation |
| Objective | To assess options and potentially save the company. | To wind up the company and distribute its assets. |
| Initiation | By directors or creditors. | By directors, creditors, shareholders, or court order. |
| Court Proceedings | Legal actions are paused (moratorium). | Legal actions are paused or discontinued, and claims are handled by the liquidator. |
| Outcome | DOCA, liquidation, or return to directors. | Company ceases to exist. |
Why This Matters
For creditors and other stakeholders, understanding the differences between administration and liquidation is crucial. The processes determine whether and how outstanding debts can be recovered and what legal remedies may be available. If your business is owed money by a company facing financial difficulties, seeking legal advice early can help protect your interests.
For tailored advice on navigating insolvency issues, contact our experienced team at Keystone.