Is it better to go into liquidation or administration?

There is no simple answer to this question. For some insolvent companies, it is better to go into liquidation; for others, it is better to enter voluntary administration. It all depends on the company’s financial position and what it hopes to achieve during the insolvency process.

The advantage of directly going into liquidation is that it is the quickest way to end the insolvency process. If the company is losing money and a turnaround seems impossible, liquidation might be the best way to maximise the return for creditors.

The disadvantage of entering into liquidation is that it may become harder for the company to sell its assets at top dollar – which in turn might mean less of a return for creditors. That’s because buyers might make low-ball offers if they believe the company is desperate to offload its assets.

The advantage of choosing voluntary administration is that it buys the company time, which might be used to restructure the company. Creditors might subsequently vote to give directors full control of the company once more, or to give them partial control through a deed of company arrangement (i.e. a compromise deal).

Alternatively, the voluntary administrator might find a buyer during the voluntary administration. That buyer may be a related party of a director or the directors themselves. They may make a settlement offer if they think that they may not be able to succeed in a deed of company arrangement proposal, for example.

However, the disadvantage of choosing voluntary administration is that it might be a costly waste of time if the company subsequently enters liquidation. In that scenario, the company might spend six to eight extra weeks accumulating losses that could’ve been avoided by directly going into liquidation.