If you run a business, you’ve probably heard the terms receivership, administration, bankruptcy and liquidation. Although they are related in some ways, they’re all used in different situations. In this article, we’ll discuss what they all mean and how they differ from one another.
Insolvency
All of these terms fall under the umbrella term of ‘insolvency’. Insolvency is where a company is unable to pay back its debts. Receivership, administration, bankruptcy and liquidation are all outcomes of insolvency. Which one applies depends on the extent of the debt and how the company wishes to proceed.
After being classified insolvent, a receiver may be appointed by a secured creditor to get their money back. Receivers go about doing this by potentially going into ‘liquidation’ which would include selling assets or the business. The receiver would then distribute the money raised in a specific order. They would also 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 a 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 unsecured creditors only receive the remainder of the funds.
Distinguishing feature
Receivership is different to the other alternatives in the sense that a receiver does not affect the legal existence of the company. The directors of the company will still remain in office – but with limited powers.
Administration
The phrase ‘going into administration’ is similar to a receiver. An ‘administrator’ is appointed in order to manage the company. An administrator, similar to a receivership, has two roles:
- To make formal agreements with the creditors to pay the debts
- To ensure the liquidation process is efficient
These are the main outcomes that result from administration:
- The company should be liquidated
- Administration should end and the directors should regain control of the company
Distinguishing feature
Administration can be more advisory in nature. This means that it’s possible that the control of the company can be reinstated to the original directors.
Liquidation
Liquidation is generally the last resort when the company is on its last legs. It often arises after receivership or administration. Usually, closing the business is the only option. Once the business has shut its doors, the liquidator will make the appropriate arrangements to begin selling the companies assets.
To go about this process, the liquidator will firstly turn all company assets into cash and then 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.
Distinguishing feature
It differs from receivership and administration because liquidation can be a consequence of each.
Bankruptcy
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 a very similar process to receivership/administration, but on a smaller scale.
However, as a single person, declaring bankruptcy will result in a 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 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.
Distinguishing feature
Bankruptcy only applies to a single person, whereas the others applied to companies.
Finally
Receivership, administration, bankruptcy and liquidation are all generally the consequences of being in serious debt. As a business owner, it’s always important to stay on top of your finances because the effects can be hugely detrimental. Receivership, administration, bankruptcy and liquidation are at times, sensitive topics for directors to consider. However, at times, it is what is best for the business. If you’d like further information on this, it is worth contacting an insolvency lawyer.
