Liquidation and Administration – What’s the Difference?

When a company enters insolvency, there’s a few roads they can venture down before closing the business for good. Two of these options are liquidation and administration – but what’s the difference between the two?  Although not something we deal with here at Core Business Brokers, our goal is to always educate our business owners – allowing them to understand the ins and outs of the business process from start to finish!

Before we talk about the difference between liquidation and administration, first let’s determine what they are. Below are a few key terms in this stage of a business journey that you may have seen before, but may not yet understand:

• Insolvency: The state of being ‘insolvent’, i.e. unable to pay one’s debts.
• Liquidation: The dissolving of a company, sharing its assets among creditors.
• Administration (or “company administration”): Business restructuring to improve the company’s financial position in hope that liquidation can be avoided.
• Creditors: An entity that the business owes money to.
• Debtors: An entity that owes money to the business.

What’s the difference between liquidation and administration?

Now that we know what all these terms mean, we can touch on the main difference between liquidation and company administration. The main difference between the two is that liquidation occurs before the company shuts down entirely. Administration, however, occurs in hope that liquidation will not be necessary.
Check out Legal Vision Australia’s article on the difference between liquidation and administration here to learn more.

Can administration lead to liquidation?

Yes, absolutely. Administration involves the sale of assets, restructuring of the company and creation of a recovery plan that allows all debts to be paid to creditors. This is done in hope that the company can return to a profitable state in the future. If this recovery plan does not prove successful and the company remains insolvent, then liquidation may occur.

For our business buyers, this is why your due diligence is so important. Knowing exactly what you are walking into when purchasing a business can help to avoid financial stress and other issues in the future.

If you’re looking to buy a business and are not sure what to look out for, contact Core Business Brokers today, (02) 9413 2977. Our extensive experience in the Sydney business industry means we know exactly what to look for in a profitable business. Email Roy on [email protected] or Rad, on [email protected] to discuss your options today.