What Happens When a Company Enters into Receivership? How About Liquidation?
There are several options for companies that owe large amounts of money to creditors and must find a way to pay them off. Receivership and liquidations are two of them. Often mistaken or misunderstood, these two procedures are not alike.
What similarities are there between receivership and liquidation?Both receivership and liquidation indicate that a company is in financial distress and has a hard time paying its debts. Either one of them requires the company's director to step out and allow a neutral third party to take charge of the business. This neutral party is either the receiver or the liquidator and their role is to pay off the company's debts. In order to do so, they are allowed to sell the company's assets, making sure they obtain the maximum value.
What is the difference between receivership and liquidation?Despite these basic similarities, there are several aspects that set these two roles apart:
- The essential difference between liquidation and receivership is that the first usually means the end of the road for a company, while liquidation allows a business to continue its operations and generate profit.
- The receiver's aim is to serve the creditors and to do so, he or she will take possession of the company's assets and sell them so that the creditors receive their money back. Moreover, the creditors are responsible for appointing the receiver.
On the other hand, the liquidator doesn't serve the interests of a particular party. They are simply there to gather the company's assets, sell them and distribute the proceeds evenly among creditors.
- While the receiver sells the secured assets, thus realizing them for the benefit of the secured creditors. The liquidator will take charge of all the company's assets and sell them to repay all the creditors.
- A company can be brought into liquidation by different entities due to their statutory right (creditors, the company's director or shareholder, the Government). A receiver can be appointed after a court order has been given and only if the company had previously granted creditors the right to place it in receivership.
- During receivership, the company's owner or director still maintains a limited role, but in liquidation, he or she loses any authority as their role is basically canceled.
- In receivership, the company can still be traded. In contrast, the liquidator can no longer trade the company.
- After receivership is completed, the company will be placed back in the hands of the director and, sometimes, resume usual activities. After liquidation, the company will no longer exist and it will be struck from the register of companies.
What is the best option for my business?Understanding the basic difference between receivership and liquidation is essential if you are about to opt for one of them. However, it's necessary to talk to a legal expert about your financial situation before you make a decision. A commercial lawyer who has experience in this area can evaluate your case and help you understand each potential outcome.