What Does It Mean When A Company Goes Into Receivership?
When debts are rising, start looking at solutions before it's too late.
The closure of a business can be a sad time for everyone involved. This is especially going to be the case when a company struggles to repay its debts. Then, the company is insolvent and will go into receivership. The best measure for a company is to be proactive and not get ahead of itself when it comes to debt. Hence, the worst case scenario for bad debts is possible penalties, jail time and the closure of a company. In contrast, the best case scenario is the receiver sells a minimal amount of your assets and the company goes back to trading.
The process of going into receivership can cause hardships. The business will have debts that they can’t meet. This means the company goes into external administration. In other words, a third party is appointed to oversee the debt issue. This external administrator is a receiver. Then, when it comes to who gets paid back first, the order is set by the Corporations Act 2001 (Cth) part 5.2 onwards. The act also sets out the powers of the receiver. Hence, it comes down to preparation and control over your finances. If you want to protect your cash flow and management of debt you could engage a debt lawyer.
Types of Creditors
In the midst of external administration, there are different types of creditors. The first is a secured creditor. This means, when the bank or credit provider supplied the money, the also had a right to claim an asset if the loan failed. The other type is unsecured, where a creditor lends money without any right to an asset. Employees, according to the Corporations Act are a different group. They are similar to an unsecured creditor but they have claim to payments above unsecured creditors. Therefore, the employees would be claiming unpaid wages once the business is in receivership.
The receiver is going to go through and sell the company’s assets in order to pay back debts. Likewise, they will also investigate to see if any offences have occurred. If the company is doing really bad then the court may appoint a liquidator. Although the company is in receivership this doesn’t prevent more legal action. As the receiver generally is covering the secured debts, it would be the unsecured creditors taking legal action. The unsecured creditors could force the company into liquidation through the courts. Therefore, a liquidator will go through the selling off as much as they can of the company to pay back the unsecured loans.
Throughout the process of receivership and liquidation, the directors still exist and so does the company. However, the receiver limits their powers over the control of assets. Although, at the end of the process, any remaining assets and money will go back to the company. Therefore, a company could technically survive a receivership and go back to normal trading. If you’re running a business and you find accounts are really dragging in repaying you could use a letter of demand.
As a company stay up-to-date with debt. The last thing you would want to experience is the pain, limitations and restrictions around the process of receivership. This means setting accurate and realistic budgets. Then putting spending and policy measures in place for the first signs of not meeting debts. As always the best solution is not to go into receivership.
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Justin is a legal intern at Lawpath as part of the content team. He is currently studying a Bachelor of Laws and a Bachelor of Economics at UTS.