What Is the Difference Between Receivership and Liquidation?
If you run a business, you most probably fear the terms ‘receivership’ and ‘liquidation’ by default. The truth is that most business owners have a hard time understanding these two notions and they frequently believe that they are the same. There are multiple differences between receivership and liquidation which I am about to explain in this post.
Liquidation Is ...the process by which a business is liquidated or ceases to exist.
Liquidation is also called 'winding up,' and it implies the appointment of a liquidator who makes sure that the interests of the company's creditors are met. The liquidator collects the company's assets, realizes them, and distributes the proceeds among creditors. The liquidator is in charge of the liquidation process, and his duty is fulfilled after the company's liabilities are discharged, and the company is officially dissolved.
Receivership Is ...the process by which a business is placed in the hands of a receiver who will manage its assets in order to repay the company's creditors.
The receiver is appointed by the creditors or the court and aims to restructure the business by managing its obligations and assets until the company is once again profitable.
What Do They Have in Common?- Both liquidation and receivership show that a business is not doing well, financially speaking
- Either through receivership or liquidation, the company's manager is required to step aside as somebody else is taking over
- That somebody else, be it a receiver or a liquidator, is required to take care of the preferential or secured creditors at first and make sure they receive their entitlements
- Whether your business is in liquidation or receivership, the appointed responsible will have to file regular reports showing the company's progress
What Sets Them Apart?There is more than one difference between receivership and liquidation. Let me summarize the essentials:
- In liquidation, the business will most likely close, whereas placing it in receivership gives it a chance to continue its operations.
- Receivers are appointed by the company's secured creditors according to a security agreement while liquidators are appointed by the company's shareholders or the court.
- After receivers take control of the company, they typically start selling those assets that secured the debt in order to repay the creditor that appointed them. Liquidators, on the other hand, are in control of all the company's assets and their effort is to repay all the company's creditors, according to their priority.
- If the company is placed in receivership, the owner still maintains a limited role. In liquidation, all the director's roles cease to exist.
- Once the receiver has fulfilled his or her role, the company's owner retakes charge of the business. After a liquidator has fulfilled his or her role, the company will cease to function, and it will be deleted from the registrar of companies.
Receivership and liquidation have their differences and similarities, and there are different circumstances when one should be preferred over another. With the help of an experienced commercial lawyer, you will find it easier to decide which is the most appropriate solution for your company.