Liquidation, receivership, administration…what’s the difference?
Corporate insolvency arises when a company is unable to pay its business debts when they are due. It is against the law for company directors to continue to run the business and acquire more debts if a company is insolvent. Corporate insolvency can be a stressful time for businesses and it is important to understand the framework for dealing with legal issues that can arise to ensure that there is the least financial and emotional stress on all parties involved. It is important to know your options when corporate insolvency arises. The three most common forms of corporate insolvency are liquidation, receivership and voluntary administration. But what exactly is the difference between these and why does it matter?
Liquidation: Liquidation (also known as “winding-up”) is the orderly winding up of a company’s affairs. It involves selling the company’s assets and distributing the proceeds among creditors and distributing any surplus to its shareholders. The three types of liquidation are court, creditors’ voluntary, and members’ voluntary liquidation. A court liquidation begins pursuant to a court order made as a result of an application to the court by a creditor of the company. A creditors’ voluntary liquidation is a liquidation initiated by the company itself. A members’ voluntary liquidation is a form of liquidation undertaken by a solvent company to liquidate its assets, and distribute these assets to its various creditors and shareholders.
Companies in liquidation will no longer be able to trade, give money to creditors or distribute any finances to their stakeholders and shareholders. When a company is liquidated its assets are then sold and the proceeds are distributed to creditors who are owed money with secured and unsecured creditors being the first to receive any funds and then shareholders. The company is then de-registered and no longer exists.
A company enters into receivership when a receiver is appointed by a secured creditor who holds security or a charge over the company’s assets. The receiver’s primary role is to collect and sell the amount of the company’s charged assets required to repay the debt owed to the secured creditor. The receiver has a duty of care to all creditors and shareholders to sell the company’s assets for the best price possible in order to recoup as much money as possible. This is to ensure that the proceedings from the company’s sold assets will be used to pay all secured and unsecured creditors the amounts that they are owed.
Voluntary administration usually arises where the directors of a company facing corporate insolvency appoint an external independent administrator called a ‘voluntary administrator’. The administrators will look at the most efficient strategies to navigate the company out of its precarious financial situation and see if it can avoid corporate insolvency.
A full review of the company’s finances will be undertaken with the results being reported to all creditors which will recommend the best course of action in relation to the company’s position in relation to its property, business structures and finances. Administrators can decide to allow the company’s directors to return to the helm of the company and end administration if they hold the belief that this will be in the best interest of the company. The administrators can also make an order that winds up the company if it is no longer financially viable and can then recommend appointing a liquidator. Another option available to the administers is for them to allow the company to approve a deed of company arrangement (“DOCA”) and allow the company to pay some of its debts and ensure that creditor returns are prioritised.
Corporate insolvency can be a stressful process and it is important to deal with it appropriately. Get in touch with Warlows Legal’ specialist Insolvency and Restructuring team today for all your insolvency advice.