If you’re a business owner or company director, you’ve probably heard of terms such as receivership, administration, and liquidation, but what exactly do they mean? These concepts refer to specific stages for companies that are close to being or are insolvent, and that have entered a period of external administration. There are significant differences between each of these concepts and they have different consequences for creditors of the company and other related parties.
Receivers are usually appointed by a secured creditor (usually a bank) that holds security over some or all of the company’s assets. In some rare cases, the receiver might be appointed by a court. The receiver’s appointment is usually subject to the terms of a charge, such as a mortgage or a fixed and floating charge over the company’s assets.
The receiver’s key responsibilities are to collect and sell the charged assets in order to repay what’s owed to the secured creditor, and then to pay out the money in the order required by law. Their responsibility is to the secured creditor and not to the other parties who are connected to the company, such as other creditors or unsecured creditors.
One key distinguishing feature of receivership is that a company in receivership continues to exist and directors can remain in office, though their roles are limited. This is quite different to companies in administration or companies facing liquidation.
Another difference is that being in receivership doesn’t necessarily indicate that a company is close to winding up in the near future. In fact, the company may well survive and succeed after the receivership ends. However, it’s fairly common for an administrator or a liquidator to be appointed to represent unsecured creditors when a company enters the receivership stage, which can mean more challenges for a company seeking to return to trading.
A good way to understand administration is to consider it as a point where your company still may be saved. At the administration stage, your company might be close to being insolvent or already insolvent. A resolution of the company directors is typically how an administrator is appointed, but sometimes liquidators, creditors, or a court can appoint an administrator.
The administrator will check the company’s books and inform creditors of their findings, and then make recommendations to creditors. They may report any offences they find to ASIC.
Voluntary administration usually results in two outcomes: entering a deed of company arrangement (DOCA) or liquidation. This is decided by a majority-wins vote at a creditors’ meeting around 26 days after the appointment of the administrator.
The first option, the DOCA, is effected by a formal agreement between the creditors and the company to administer the company in a certain way. Depending on the agreement, the path forward might be continued trading, directors and other parties contributing funds or releasing claims, debt refinancing, or sale of assets. The primary goal of a DOCA is always to realise a higher return for the company’s creditors than would be achieved with liquidation.
Although it’s rarer, there’s a third possible outcome, which is that the administrator will recommend that the company be returned to the control of the directors.
Liquidation differs from administration and receivership because once a company is in liquidation, it usually means the company will permanently stop trading and cease to exist. While there are ways back to trading from administration and receivership, liquidation usually means that the liquidator will realise the company’s assets and distribute these among creditors before deregistering the company.
Liquidation can happen when a company is unable to pay all its debts as they become due, or it can happen voluntarily when the company members vote to end the company’s existence. In the case of involuntary liquidation, a court can order the winding up or a creditor might apply for the process to start.
There are some key differences between receivership, administration and liquidation to keep in mind:
- Role of appointee – Receivers, administrators and liquidators all have different responsibilities. For example, the receiver’s key responsibility is to recover debt for secured creditors. Administrators are responsible for investigating the company’s affairs and bringing out a resolution (DOCA or liquidation) that will be the most lucrative for creditors. Liquidators, on the other hand, wind down the company and realise its assets to pay off creditors in priority order.
- Company’s existence and trading status – Liquidation usually means the company will soon cease to exist. On the other hand, companies can still survive administration and receivership and return to trading.
- Impact on creditors – Receiverships usually end with secured creditors being paid, while the impact on creditors can be different in administration depending on the terms of the DOCA. In liquidation, priority creditors are those that are paid first, with the remaining funds distributed according to priority.
- Voluntary versus involuntary – Both liquidation and administration can be voluntary or involuntary, but receivership is usually initiated by an outside entity – a secured creditor.
Whether or not you have reason to believe your company is close to any of these three stages, consult an insolvency expert as a matter of urgency if your business is struggling financially. The signs might have already been there for some time, but getting advice as soon as possible is vital for exploring your options, understanding your legal obligations and perhaps giving your company the best chance for survival.