Liquidators in Insolvency
Halt | December 20, 2022 | 0 Comments

The Role of Receivers and Liquidators in Insolvency

Companies that are struggling financially have a number of options available. Administration, liquidation and receivership services are all a possibility. The best choice depends on the company’s circumstances and whether its debts are owed to secured or unsecured creditors. Receivership and liquidation are two of the most common solutions. While receivership and liquidation share many similarities, the two processes are intended to help with very different situations. In this article we’ll look at both procedures in more detail to find out the differences between receivership and liquidation.

Liquidation

Liquidation Proceedings

Creditors are entitled to have their debts repaid on time. A company that’s unable to repay debts to creditors is deemed to be insolvent. Ultimately, insolvency leads to liquidation, where an external Liquidator is appointed to take control of the company.

Liquidation proceedings are specifically designed to allow creditors to recover the money they are owed from failing businesses. During liquidation, the Liquidator takes control of the company, investigates its finances and sells its assets. Any money made from the sale of assets will eventually be distributed to secured and unsecured creditors (including employees). Along the way, the Liquidator will also search for possible offences and report any suspicious activity to ASIC. Liquidators have a responsibility to all creditors, and they will hold several meetings throughout the process to report their findings to an assembly of creditors.

It’s common for a company that’s in liquidation to also be in receivership.

Receivership

Receivership Proceedings

Receivership occurs when a secured creditor appoints a Receiver to recover a debt over a secured asset. During receivership, the Receiver will take control of some (or all) of the company’s assets. The Receiver is permitted to sell assets to recover the money the company owes. Secured creditors have a special right to appoint a Receiver because of the security interest they hold. There are two types of security interests that a creditor may hold:

  • Circulating security interests – are assets used or disposed of during normal trading, like stocks and cash
  • Non-circulating security interests – are assets like property, land, plant and equipment

A receiver is liable only to the secured creditor by whom he is appointed. The Receiver has the power to collect and sell the company’s assets. This includes the secured asset as well as other company property. At the end of proceedings, the Receiver makes their report to the creditor who is secured. A Receiver has no duty to unsecured creditors, although they are obliged to sell assets for no less than market value. And, if there is money left over after the creditor who is secured has been repaid, unpaid employee claims (such as wages, superannuation and leave) may be paid.

It’s common for a company in receivership to also be in administration, liquidation or a deed of company arrangement.

Liquidation and Receivership

The Differences Between Liquidation and Receivership

Financial difficulties are a normal part of the business world. Many companies find themselves facing liquidation or receivership services. While these two procedures often look similar from a distance, they’re designed for very different situations. There are several major differences between liquidation and receivership:

  • How proceedings begin – In most cases, the directors and shareholders of a company will voluntarily enter into liquidation if the business is insolvent (or if they suspect that it will become insolvent). On the other hand, receivership is always commenced by a third party and is considered “involuntary”.
  • Creditor’s legal action – During liquidation, unsecured creditors are prevented from commencing or continuing most legal debt recovery proceedings against the company. Receivership imposes no limits on unsecured creditors, and they may continue or commence legal proceedings, regardless of the appointment of the Receiver.
  •  Creditor repayments – A secured creditor appoints a receiver and receivers only have a duty to them. Any money made from the sale of assets will go to the creditor who is secured (with the remainder being returned to the company). Liquidators have a duty to all creditors. The Liquidator will make distributions to all secured and unsecured creditors in the established priority order.

The outcome – Liquidation is specifically designed to wind up a company. Once proceedings are complete, the company is deregistered and ceases to exist. By comparison, receivership ends once a secured creditor’s money has been recovered. It’s entirely possible for a company to survive receivership and continue trading as normal.

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