Administration, Receivership and Liquidation – the key differences
If you’re a customer, supplier, business owner or a company director you’ve probably heard of the terms Administration, Receivership and Liquidation. These concepts refer to the specific status of companies that are close to being, or are insolvent, and have entered a period of external management. There are significant differences between each of these concepts and their consequences for creditors of the company and other related parties.
Administration is generally considered at a point where a company is struggling financially. It may be close to being insolvent or is already trading insolvently but may be able to be saved.
In these circumstances an external administrator is appointed to ascertain if this can be achieved. A resolution of the company’s directors is typically how an administrator is appointed (known as “voluntary administration”) but they can also be appointed by a liquidator, creditor, or a court.
The administrator will investigate the company’s affairs and compile a report that addresses key areas of the company’s current status including its financial circumstances and its past management. These findings will be reported to creditors together with a list of the administrator’s recommendations. Administrators are also required to report to ASIC any potential offences they discover while conducting their investigations.
Voluntary administration generally results in one of two outcomes – entering a deed of company arrangement (DOCA) or liquidation of the company. This is decided by a majority vote at a creditors’ meeting which usually takes place about 26 days after the appointment of the administrator. A 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 is rarer, there is a third possible outcome where the administrator will recommend that the company be returned to the control of the directors.
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 or mortgage 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 these funds in the order required by law. The receiver’s responsibility is to the secured creditor and not to the other parties who’ve had dealings with the company including unsecured creditors.
One key distinguishing feature of receivership is that a company in receivership continues to exist, and its directors can remain in office, although 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’s 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.
Liquidation differs from administration and receivership in that is 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 potential ways for a company to return to trading from administration and receivership, liquidation will generally result in the liquidator realising the company’s assets and then distributing the proceeds among creditors before deregistering the company.
Liquidation can occur when a company is unable to pay debts as required (provisional or involuntary liquidation), or voluntarily when the company members vote to end its existence (voluntary liquidation). In the case of involuntary liquidation, a court can order the winding up or a creditor might apply for this process to commence. Shareholders concerned about the company’s directors’ conduct can also pursue provisional liquidation to bring in a provisional liquidator to protect the company’s interests.
Some of the key differences between administration, receivership and liquidation include:
- 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 securing 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.
If you require further information about any matter concerning Administration, Receivership or Liquidation or need advice about any business or company matter please contact Michael Battersby or John Bateman on 02 4731 5899 or email us at email@example.com.