Differences between liquidation administration and striking off

These are three distinct ways in which a company can come to an end or be dealt with when it is in financial difficulty, and they serve quite different purposes.

Liquidation:

Liquidation is the process of winding up a company's affairs, realising its assets, and distributing the proceeds to creditors and, if there is any surplus, to shareholders. Once the process is complete, the company ceases to exist.

There are several types. A compulsory liquidation is initiated by a court order, usually following a petition by a creditor who is owed a debt and can demonstrate that the company is unable to pay. A creditors' voluntary liquidation is initiated by the directors and shareholders when the company is insolvent and cannot continue trading. A members' voluntary liquidation is used where the company is solvent but the shareholders simply wish to close it down, for example to extract value in a tax-efficient way.

In all cases, a licensed insolvency practitioner acts as liquidator. The liquidator takes control of the company, realises assets, investigates the conduct of the directors, adjudicates on claims, and distributes funds in the statutory order of priority. The governing legislation is primarily the Insolvency Act 1986.

Administration:

Administration is a rescue procedure. Its primary purpose is not to close the company down but to achieve a better outcome than would be achieved in an immediate liquidation. A company enters administration when an administrator, who must be a licensed insolvency practitioner, is appointed either by the court, by the holder of a qualifying floating charge, or by the company or its directors.

Once in administration, the company benefits from a statutory moratorium, meaning creditors generally cannot take enforcement action or commence or continue legal proceedings without the court's permission or the administrator's consent. This breathing space gives the administrator time to explore options.

The administrator must pursue one of three statutory objectives in order of priority under the Insolvency Act 1986, as amended by the Enterprise Act 2002. The first and preferred objective is to rescue the company as a going concern. If that is not reasonably practicable, the second objective is to achieve a better result for the company's creditors as a whole than would be likely if the company were wound up without first being in administration. The third, which can only be pursued if the first two are not reasonably practicable, is to realise property to make a distribution to one or more secured or preferential creditors.

Administration can lead to a variety of outcomes. The company might be rescued and returned to its directors. The business might be sold as a going concern to a third party, sometimes known as a pre-pack sale. Or the company might ultimately move into liquidation if rescue is not possible.

Striking off:

Striking off is a much simpler and cheaper process and is not an insolvency procedure at all. It involves the removal of the company from the register maintained by Companies House, after which the company is dissolved.

A company can be struck off voluntarily under section 1003 of the Companies Act 2006 by applying to the Registrar of Companies. To use this route, the company must not have traded or carried on business in the previous three months, must not have changed its name in that period, must not be subject to any insolvency proceedings, and must not have made any dispositions of property other than those necessary for the application. The directors apply on form DS01, and there is a notice period during which objections can be raised.

Companies House can also strike off a company compulsorily under section 1000 of the Companies Act 2006 if it has reasonable cause to believe the company is no longer carrying on business or in operation, typically because the company has failed to file accounts or confirmation statements.

Striking off is appropriate where a company has no significant assets, no outstanding debts, and no need for a formal winding-up process. It is not appropriate where there are creditors to be paid, as it does not involve any investigation of the company's affairs or any formal process for dealing with debts. If a company is struck off while it still has debts, creditors can apply to restore the company to the register and pursue their claims.

Key practical differences:

Liquidation is about bringing a company to an end in an orderly way, with proper investigation and distribution to creditors.

Administration is about trying to rescue the company or its business, or at least achieve a better outcome than liquidation, with the protection of a moratorium.

Striking off is a simple administrative removal from the register, suitable only for dormant or inactive companies with no outstanding liabilities.

The costs differ enormously. Striking off costs very little. Administration and liquidation both involve the appointment of a licensed insolvency practitioner and can be expensive, with administration typically being the most costly due to its complexity.

If you are dealing with a specific situation involving any of these processes, the right route depends on the company's financial position, whether it is trading, what assets and liabilities it has, and what outcome the directors or creditors are trying to achieve.