Liquidation & Administration – What are they and how do they work?

Liquidation & Administration – Let’s Explore What They Really Mean

A liquidation or administration can happen during or after an acquisition. An acquisition is a process that occurs when one company decides to take over the operations of another company. To accomplish this goal, Inc & Co, or the company that is acquiring the other business will either buy the majority of or all of the shares in the company that is being taken over, such as our initial purchase of Maker&Son.

A straightforward acquisition (through a share purchase) is where you buy all or some of the shares in the company, there are other options such as buying the assets and intellectual property. This is done with the permission of the Administrator, who will allow the transfer of ‘assets’ into a new limited company. This new entity will be brand new and so doesn’t have debts the previous owners may have created.

If during the Administration the business doesn’t have assets to sell, or there is no salvaging the business, then the business will be put into Liquidation and following a standard investigation into the previous director’s conduct, the business will cease to exist.

Inc & Co works with companies that may be struggling, from historical debt to poor management or just Directors who have reached a point where they don’t want to continue for personal reasons. We never like to see any company enter Administration or Liquidation, and so our sole purpose from inception has been to use our expertise to turn business around and help them prosper. This isn’t always practical, sadly.

Administration

When a business begins the process of going into administration, it is officially beginning a formal legal process. In addition to this, the business is now officially considered insolvent.

An administration through authority, even though they are still obligated to fulfil their duties to the company. An Administrator, who is a person who is appointed to serve as an agent, will then manage the company’s affairs.

In addition, a moratorium will be imposed. The big issue here is to stop any legal proceedings that are already underway and prevent any new legal proceedings from starting unless the administrator or the courts agree that these activities can continue after the moratorium is lifted.

Liquidation

A limited company can be forced into liquidation, which is a legal process that involves putting an Administrator in charge of “winding up” the business. Following the completion of this procedure, the company will no longer exist. When a company goes out of business, it doesn’t always mean that its creditors will be paid back.

The goal of the Liquidation process is to make sure that all of the business issues of the company have been dealt with in the right way. At Inc & Co, we would normally step in with the acquisition process before a company goes into liquidation, thus saving as many jobs as possible and potentially the business reputation.

Acquisitions Explained

Why do businesses go bust?

There are all sorts of reasons why a business goes bust, especially smaller ones.
To begin, we need to take into consideration the first and most obvious factor, which is financing. It is simple for a business that does not have sufficient financial resources to get into debt and become insolvent, (can’t pay its debts). However, for many, things do not go as planned and this may lead directly to administrative proceedings.

Their company does not achieve the level of success that they had planned for. They have a hard time making ends meet, therefore, when they are unable to make their repayments, they also may be issued a county court judgement (CCJ). In the UK, not being able to pay company debts, is the most common reason why a business fails.

Market instability is another common reason for business failure. Many companies have a significant reliance on the market in the UK. If there is an expansion in the size of the economy, then things are likely going swimmingly. When the economy is healthy, it is a lot less difficult to run a company successfully.

Sometimes, a company going bust, either through a liquidation or administration is usually down to poor management – previous directors usually will try to keep their businesses going as long as possible, and in that case, running up hundreds of thousands or millions of pounds of debt, and don’t usually stop and investigate why they are in debt.

This then, in the end, leads to an avalanche of destruction, ruining supplier’s reputation and leaving staff out of jobs at a moment’s notice.

Why do redundancies happen in a liquidation or administration?

One thing that happens a lot when companies get into financial trouble is redundancies.

When a business wants to reduce its workforce, one of the options available to them is to lay off employees through a process known as redundancy. A worker can be let go due to redundancy in the UK if any of the following conditions are met:

  • The employer has either stopped continuing the business or has stated their intention to do so in the future.
  • The necessity for employees to do work of a particular kind or to carry it out at the location where they are employed has been eliminated or significantly reduced such as no longer needing a particular role.

No one wants redundancies to happen, but if a company is going into liquidation or administration, there is no other option. If there is no business, there are no jobs. 

Sometimes it is a necessary step to save money to prevent a company from going bust. If the company can make savings through salaries, it might just be enough to keep them afloat a little longer. Inc & Co has worked with owners to do this on a few occasions, it’s not always the answer, however.

Whatever the reason for a redundancy, whether it is one or two staff to save money or because the business is going to cease to exist, it is tough. Staff who have been there for two years or twenty years won’t like the feeling of being made redundant. 

Again, this is something that Inc & Co want to avoid, especially when the situation is a result of the previous director’s actions. And if an acquisition by Inc & Co can help keep a company going and see the staff stay in employment for longer, well, it’s a win for everyone.

Finally

Liquidation and administration can be a long and drawn-out process. Throughout the period it can be tough for everyone involved; the previous directors, suppliers, customers and staff. Usually, the specifics around how and when this type of process happens are kept private, as it is usually quite sensitive when jobs may be at stake.

The wrapping up of any company through these two options can also be lengthy and it’s normal for old suppliers to be unhappy and also the staff.

Rest assured throughout every liquidation it is mandatory for the administrator to conduct an investigation into the conduct of previous owners and this is best practice to protect all those who have had a financial stake in the company.

Inc & Co are always keen to work with directors of failing companies and while it can be a sensitive time, we would always encourage you to first get legal advice, and then read more about how we can help.

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