Author
Mitch BallChief of Insolvency Operations & ASIC Registered Liquidator
(02) 9220 7117
If you are 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 the same applies to consequences for creditors of the company and other related parties.
Receivership
A receiver is 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 key responsibilities of the receiver are to collect and sell the charged assets in order to repay what is owed to the secured creditor. If there are any funds remaining, the receiver must distribute 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. That includes 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 or liquidating. In fact, the company may well survive and succeed after the receivership ends with responsibility handed back to the company directors. It should also be noted that it is fairly common for an administrator or liquidator to be appointed to represent unsecured creditors when a company enters into receivership. This can create additional challenges for a company seeking to return to trading.
For more information, view our receivership FAQs.
Administration
A good way to understand administration (https://australiandebtsolvers.com.au/voluntary-administrator/guides/a-creditors-guide-to-voluntary-administration) is to consider it as a point where your company may still be saved. Administration is a stage where your company might be close to being insolvent, or is already trading insolvent. A resolution of the company directors is typically how an administrator is appointed. They can also be appointed by a liquidator, creditor, or court.
The administrator will compile a report that addresses key areas of the company including financial circumstances, management or affairs, and processes. These findings will be reported to creditors and accompanied by a list of recommendations. They are also responsible for reporting any offences they find to ASIC.
Voluntary administration usually results in two outcomes: entering a deed of company arrangement (DOCA) (https://australiandebtsolvers.com.au/voluntary-administrator/guides/explaining-a-deed-of-company-arrangement) 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 affected 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 is rarer, there is a third possible outcome where the administrator will recommend that the company be returned to the control of the directors. Having a thorough understanding will help you learn how to avoid common pitfalls in voluntary administration. (https://australiandebtsolvers.com.au/voluntary-administrator/guides/how-to-avoid-common-pitfalls-in-voluntary-administration)
For further details, read our administration FAQ (https://australiandebtsolvers.com.au/voluntary-administrator/guides/administration-faqs).
Liquidation
Liquidation differs from administration and receivership in that it signals the end of a company's existence. 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 debts as required, or voluntarily when the company members vote to end its existence. In the case of involuntary liquidation, a court can order the winding up or a creditor might apply for the process to start.
Liquidation is further broken down into three options for qualifying small businesses:
- Members' voluntary liquidation (https://australiandebtsolvers.com.au/liquidator/guides/what-is-a-members-voluntary-liquidation)
- Provisional liquidation (https://australiandebtsolvers.com.au/liquidator/guides/what-is-provisional-liquidation)
- Simplified liquidation (https://australiandebtsolvers.com.au/liquidator/simplified-liquidation).
Key differences
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 key responsibility of the receiver 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 rights during a creditors administration (https://australiandebtsolvers.com.au/voluntary-administrator/guides/creditors-during-voluntary-administration-knowing-your-rights). This will provide your company with the best prospect of returning to prosperity.
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