If you’re a company director and you believe your business is at risk of becoming insolvent, it’s wise to seek professional advice as soon as possible.
A qualified insolvency practitioner like Corporate Lifeline will assess the company’s financial position and discuss appropriate actions, which may include corporate liquidation or business receivership.
In this article, we describe the difference between liquidation and receivership and we provide an overview of each process.
By understanding potential insolvency processes and acting promptly, you might avoid the severe consequences of insolvent trading and explore alternatives with better outcomes for the business, its employees, and its creditors.
The Difference Between Liquidation and Receivership
Let’s start with a view of receivership vs liquidation and list the major differences to help you make informed decisions to protect your business and its stakeholders.
- Purpose:
Liquidation’s main goal is to wrap things up by selling off all assets, paying off debts, and then closing the company for good.Receivership is more about recovery. It focuses on managing and selling specific assets to repay a secured creditor. - Appointment:
Liquidation can be initiated voluntarily by the company’s shareholders or directors, or involuntarily by the court.Receivership is almost always kicked off by a secured creditor or, less commonly, by the court. - Control and Continuity:
The liquidator takes full control of the company’s assets, and the management steps aside.Receivership might still see some business operations continuing, as the receiver manages assets to maximise the recovery for the secured creditor. - Impact on Employees:
Unfortunately, liquidation often leads to job losses because the company ceases operations.Receivership might have a different impact, as the receiver’s focus is on the assets and debt repayment, which could mean some restructuring and potential job changes, but not necessarily total job loss.
Voluntary vs. Involuntary Processes
- Liquidation: Directors may voluntarily opt for liquidation if they believe the company is insolvent, taking proactive steps to wind things down.
- Receivership: Always initiated involuntarily by a secured creditor, aiming to recover the debt under a security agreement. The court can also step in to appoint a receiver in some cases.
Legal Actions and Creditor Repayment
- Legal Actions:
In liquidation, all legal actions by creditors are generally put on hold once a liquidator is appointed.In receivership, unsecured creditors can still take legal action to recover debts. - Creditor Repayment:
Both receivers and liquidators have duties to creditors, but their focus differs. Liquidators handle all company assets and prioritise payments according to legal guidelines.Receivers focus solely on repaying secured creditors by managing and selling the secured assets.
Final Outcomes and Trading Ability
- Liquidation: This process is the end of the road for a company. Once everything is settled, the company is deregistered and ceases to exist.
- Receivership: The company might still have a chance to bounce back if the receiver can settle the debts. Once the secured creditor is repaid, the company could potentially continue its operations.
Who’s Interests Are Represented?
- Liquidation: The liquidator works for all creditors, ensuring debts are settled fairly and any misconduct is investigated.
- Receivership: The receiver acts primarily for the secured creditor, but there’s some wiggle room to benefit the company’s overall situation.
Management’s Role and Business Continuity
- Management Involvement:
Liquidation, however, sees the management completely sidelined, with the liquidator taking over all operations.In receivership, the company’s owners may still play a role, albeit a limited one, as the receiver manages the asset sales. - Trading Ability:
Liquidation doesn’t have this flexibility – once the process starts, the company is winding down to close permanently.Receivership might allow the business to keep trading if it helps repay the secured creditor.
What is Business Liquidation? An Overview
Corporate liquidation involves selling the company’s assets, settling debts with creditors, and distributing any remaining funds to shareholders. There are various forms of liquidation, each suited to different circumstances.
Creditors’ Voluntary Liquidation (CVL)
The company’s shareholders or creditors initiate a Creditors’ Voluntary Liquidation.
The liquidator’s primary role is to realise the company’s assets and distribute the proceeds to creditors in order of priority as set out in the Corporations Act.
Court Liquidation
Court liquidation occurs when a liquidator is appointed by the court, usually following an application by a creditor, though directors, shareholders, or the Australian Securities and Investments Commission (ASIC) can also initiate this process.
Simplified Liquidation Process
Introduced in 2021, the simplified liquidation process offers a streamlined approach for eligible small companies. This process aims to reduce costs and complexity for some businesses.
Exploring Receivership: What You Need to Know
In this section, we take a brief look into the receivership process:
Appointment of a Receiver
A receiver is typically appointed in one of two ways:
- By secured creditors
- By the court
Role and Responsibilities of a Receiver
Once appointed, a receiver’s primary duties include
- Taking control of company assets
- Selling assets to repay secured debts
- Managing ongoing business operations
- Reporting to ASIC.
Expert Corporate Advisory Services: Your Path to Financial Stability
At Corporate Lifeline, we understand facing financial difficulties can be overwhelming. We’re here to guide you through every step of the insolvency process, offering professional advice and tailored solutions to help your business navigate these challenging times.
Our team of experienced insolvency practitioners specialises in providing comprehensive corporate advisory services. We help you understand the receivership vs liquidation processes. We work closely with you to assess your unique situation and develop strategies to best serve your interests and those of your creditors.
The earlier you seek our advice, the more options we’ll have to help you navigate financial distress. Our commitment is to provide you with clear, practical guidance and support throughout the entire process.