Receivership vs Liquidation in Australia
Receivership and liquidation are distinct processes for addressing financial distress in companies. Receivership allows a company to operate under the management of a receiver to repay creditors, preserving some control for the company’s owners. In contrast, liquidation marks the company’s end by selling off assets to settle debts, completely removing the owners and directors from their roles and leading to the company’s closure.
Read below for more information on Receivership vs Liquidation.
What Is Liquidation?
Liquidation is an insolvency procedure that allows creditors to recover the money they are owed from an insolvent company. Should a company become unable to repay its debts as and when they’re due, it will be deemed insolvent, and creditors or shareholders may choose to place the company into liquidation.
The court liquidation process is overseen by an independent Liquidator. The Liquidator’s role is to take control of the company, realise the value of any assets and distribute that money to secured and unsecured creditors. During the process, the Liquidator will also investigate the company’s affairs to recover voidable transactions and report possible offences to ASIC. Along the way, the Liquidator will have a duty to all creditors, and is required to hold meetings with secured and unsecured creditors to report on the company’s affairs.
It’s possible for a company in liquidation to also be in receivership. Click here to find out more about what is liquidation?
What Is Receivership?
A company enters receivership when a secured creditor (such as a bank that holds a mortgage) appoints an independent Receiver to help recover a debt the company owes. Secured creditors are entitled to appoint a Receiver because they hold a secure interest over the company. Secured interests take two forms:
- Non-circulating interests – such as an interest in real property, plant or equipment
- Circulating interests – such as assets that are used in the course of normal trading, such as cash and stock
Receivers have a duty to the secured creditor that made the appointment. During the process, the Receiver has the power to collect and sell the company’s assets to recover the creditor’s money. Importantly, Receivers aren’t limited to selling the secured asset – they may also sell other company property to satisfy the debt. Receivers have no duty to report their findings to unsecured creditors, although they are obligated to sell assets for market value.
It’s possible for a company in receivership to also be involved in administration, liquidation or a Deed of Company Arrangement.
The Difference Between Receivership and Liquidation
A company that owes money to a secured creditor may find itself facing receivership or liquidation. While the two look similar on the surface, receivership vs liquidation are very different proceedings. There are 4 key areas of difference:
- Voluntary vs involuntary. It’s common for the directors of a company to commence liquidation proceedings voluntarily if they suspect that the business is insolvent. Receivership is always commenced involuntarily by a secured creditor or, rarely, the court.
- Legal action. Unsecured creditors are permitted to commence or continue legal proceedings to recover debts despite the appointment of a Receiver. Compare this to liquidation, where creditors can no longer commence or continue legal action after the appointment of the Liquidator.
- How creditors are repaid. Receivers and Liquidators both have a duty to the creditors of a company. A Liquidator is responsible for realising the company’s assets and paying dividends in the established priority order. Receivers are only responsible for repaying secured creditors.
- The outcome. Liquidation is the final step for an insolvent company. Once the liquidation is complete, the company is deregistered and ceases to exist. On the other hand, receivership does not result in the company being wound up. If the Receiver can recover the money the secured creditor is owed, the company may be able to trade on as normal.
Experiencing Financial Difficulty? Speak to the Team at SV Partners Today
There’s often a fine distinction between receivership vs liquidation. The two systems overlap in certain areas, and it’s not always clear which option will provide the best outcome for creditors, employees and your company. If you’re exploring your options then get in touch with SV Partners.
SV Partners are experienced Receivers and Liquidators. We offer assistance and advice for a wide range of liquidation proceedings. If your company has received a demand or is at risk of receivership and liquidation, get in touch with our team. Seeking early advice is the best thing you can do to protect your business. Contact us to make an appointment or phone us on 1800 246 801 for a confidential consultation.