Administration is a “rescue” procedure where the administrator takes control of the business, assets and affairs of the company. When a company is in administration creditors are prevented from enforcing their debts against the company. Since the company may carry on trading whilst in administration, this gives the company an opportunity to get back on its feet.
Even if the company does not recover, the value of the goodwill in the business may be preserved because it has been able to trade (which is possible only in very limited circumstances in a liquidation). The business may be sold to a third party immediately after the administrator’s appointment by way of a “pre-pack”, or at any time during the administration.
Since administration has the potential to “rescue” the business, it carries less stigma for the directors than if the company enters insolvent liquidation. However, administration is meant to only last 12 months, and often ends up with the company entering insolvent liquidation having sold all its business and assets for less than the total value of the creditors’ claims.
There are number of similarities between liquidation and administration. Both liquidators and administrators are officers of the court and of the company, which means that they have a duty to act honourably and fairly, and to act in the best interests of the creditors as a whole. Within the first 6 months of their appointment, the liquidator or administrator must investigate and report on the conduct of the directors.
Besides the ability to continue to trade, another key difference between liquidation and administration is that a liquidator has wider powers than an administrator to bring court proceedings against directors and third parties