What is the difference between receivership, administration, and liquidation?
As a company director, you may have heard of the words receivership, administration, and liquidation but you are not sure about the differences.
There are significant differences between each type of insolvency appointments and they have different consequences for creditors and other stakeholders.
Normally, Receivers are appointed by a secured creditor who holds security over some or all of the company’s assets. The Receiver will collect and sell company assets to repay the secured creditor. Their responsibility is to the secured creditor who appointed them and not general unsecured creditors who may also be owed money.
Usually a Voluntary Administrator is appointed by the directors of the company. This type of appointment is chosen when the company is still trading but has unpaid debts which it cannot pay. The administrator will act for all creditors (even a secured creditor) and will carry out detailed investigations and prepare a report to all creditors. At the end of the administration process, creditors will be asked to vote on 3 possible outcomes which are explained below:
- Enter into a Deed of Company Arrangement (DOCA):
A director can propose a Deed of Company Arrangement which is a formal agreement between the creditors and company to compromise the debts of the company. The primary goal is for creditors to receive a better return compared to if the company was wound up and placed into liquidation.
- Enter into Liquidation:
If no DOCA is proposed and the company is insolvent then the most likely outcome is liquidation.
- Return control of the company to the directors:
If none of the above options are passed at the meeting, creditors can resolve to return the control of the company back to the directors.
If a company is placed into liquidation the liquidator will take immediate steps to stop the company from trading and will also sell off any assets. Once the assets have been sold, the liquidator will disburse the surplus funds in accordance with the priorities as set out under the Corporations Act.
If you want to enquire about receivership, voluntary administration or liquidation, please call our 24 Hour insolvency advice line on 1800 210 073. We offer FREE initial advice.