An insolvency practitioner’s appointment to a debtor is generally a worrisome thing to creditors as it is deemed to mark the company’s death with no return on any outstanding debts. While this is true that such an appointment is an indication of serious financial trouble. It is important to understand the differences between receivership, administration and liquidation and how they affect creditors dealing with a financially unstable company.
What’s the difference between Receivership, Administration, Liquidation and how does it affect creditors?
What is Receivership?
Simplified scenario: It mainly concerns the bank or secured creditors
Receivership is when a secured creditor such as a bank appoints a trustee to act as a custodian of company’s assets or business operations. This is done to make sure the bank or secured creditor gets paid.
Hence, a receiver operates only for the advantage of the secured creditor for whom it was designated and not all creditors (although they are subject to specific duties).
In most cases a receiver will be appointed under the provisions of a security instrument (such as a fixed and floating charge, or ‘all present and after- acquired property’), which specifies the powers of the receiver. A court order is not usually needed for a receiver’s appointment.
Depending on the type of the security instrument, a receiver may be appointed to simply realise and sell the secured assets, or to also take control of the company’s assets or business operations from the directors thus acting as (a receiver and manager).
Granted, receivership is not a good sign for unsecured creditors. But, it does not necessarily mean the company is folding or winding up. However, it is not uncommon at a practical level for an administrator or liquidator to be appointed immediately to represent the interests of unsecured creditors while the business is in receivership.
What is Voluntary Administration?
Simply put: The company can be saved
Voluntary administration is a process in which an insolvent company or company near insolvency is placed in the hands of an independent person who can evaluate all available options and produce the best result for a business owner and creditors.
Simply put: The business is winding up or has come to an end
Once a company has been placed in voluntary liquidation or compulsory liquidation the most likely outcome is the winding up of the business.