If you’ve heard the terms receivership, administration, bankruptcy and liquidation thrown around in similar contexts and not have any idea how they actually differ – you’re not alone. Learn about which means what.
Essentially, all of these terms fall under an umbrella of ‘insolvency’ (where a company is unable to service its debt at their deadlines) and must return money to creditors (anyone owed money). Following this, the four terms listed above are the potential paths to proceed when classified as ‘insolvent’.
After being classified insolvent, a receiver may be appointed by a secured creditor to get their owed money back. Receivers go about doing this by potentially going into ‘liquidation’ which would include selling assets or the company’s business. The receiver would then distribute the money raised in a specific order required by law as well as report any possible offences to the Australian Securities & Investments Commission (ASIC). A court order is not necessary for this process.
The primary duty of a receiver is to the secured creditor (which ranks above unsecured creditors in the priority of payments), where they would hold security over some or all of the company’s assets. Unfortunately, often this means that it is often tough luck for the unsecured creditors who are left with the remainder of the company’s remaining funds.
Receivership is different to the other alternatives in the sense that a receiver does not affect the legal existence of the company. As such, the directors of the company will still remain in office but with limited powers, contingent upon the extent of assets that the receiver is appointed.
The phrase ‘going into administration’ is similar to a receiver, where an ‘administrator’ is appointed to manage the company in the interim. An administrator, similar to a receivership, has two roles:
(i) to make formal agreements with the creditors to pay the debts, or
(ii) to ensure an efficient liquidation process – administrators are required to be liquidators.
There are three outcomes that can occur from going into administration:
1. Company should be liquidated; or
This document will communicate to the creditors how the situation will be handled. Often, companies will propose to return less than the full value of the debt owed, but might be the best option for the creditors;
2. Company should be liquidated; or
Essentially a last resort option and this will be covered in detail below.
3. Administration ended and control returned back to directors of the company.
Administration can be more of an advisory option where there is potential that the control of the company can be reinstated to the original directors.
Liquidation is generally a last resort option, when the company is on its metaphorical deathbed. Generally, liquidation arises after engaging receivership or administration, and where the only option left is for the company to shut down and to sell everything of value. The particular role of liquidation is to wind up all affairs for the company so that it will cease to exist.
To go about this process, the liquidator will firstly turn all company assets into cash and then to distribute the proceeds between the creditors, and following this, passing on surplus funds to the shareholders. Finally, the liquidator will incite ASIC to remove the company from the register to end the company’s legal existence.
It differs from receivership and administration because liquidation can be a consequence of each.
This is another insolvency procedure but the key difference is that bankruptcy applies to a person, whereas the previously discussed paths apply to companies. Typically, bankruptcy is is a very similar process to receivership/administration, but on a smaller scale.
However as a single person, declaring bankruptcy will result in a black mark next to your name on the National Personal Insolvency Index (NPII). The NPII is an electronic register that is readily accessible by any person and contains brief information regarding name, DoB and address. Although, it’s worth noting that the black mark will generally remain for five years.
As with the other methods, here, a ‘trustee’ is appointed and can acquire your assets for sale, cease income that you earn over a specified limit and even recover property that has been transferred to another person.
Bankruptcy only applies to a single person, whereas the others applied to companies.
Now, fingers crossed you won’t find yourself in one of these situations.
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