Defining the Differences

Most creditors would be very concerned by the appointment of an insolvency practitioner and it usually means their hard work is coming to a sad end.  We wanted to clarify the definition between voluntary administrations, liquidation, receivership. 

Receivership
The biggest difference between receivership and the other means of dealing with an insolvent company is that a bank or other form of ‘secured’ creditor normally chooses the receiver and they ensure they get paid. The primary role of the appointed receiver to act is solely on behalf of the secured creditor (which is often the bank) and not on behalf of all other creditors.
Generally, the appointment of a receiver occurs under the provisions of a security instrument, which stipulates the functions of the receiver. A court order is not necessary to appoint a receiver. Depending on what kind of security, a receiver may be appointed for the sale of secured assets, or, additionally, to take over from the directors in controlling the company to continue business on behalf of the insolvent company. Whilst receivership is a negative indicator for unsecured creditors, it doesn’t always indicate that the death of the company. It is not uncommon for an administrator or a liquidator to be appointed as a representative of those unsecured creditors during the receivership stage of a company.

Voluntary Administration
A company in administration is either about to become insolvent or already insolvent since it cannot service its debts. Administrators, usually receive appointment when the directors of the company pass a resolution, although it is also possible to be appointed by a liquidator, secured creditor or via a court order. The job of a voluntary administrator is to inspect the company’s books, to communicate with creditors on these findings and to make a recommendation to these creditors as to what the company should do.
Generally, there are two probable outcomes:
  1. Arrange for the company to enter into a deed of company arrangement (DOCA). This is a formal agreement between a company and its creditors outlining how the company’s affairs will be handled, which may be agreed to as a consequence of the voluntary administration of the company.
  2. Enter into liquidation.
In some circumstances, upon evaluation of the company’s affairs, the administrator suggests the company is returned to the directors. It’s the creditors, at a meeting that takes place around 26 days after having appointed the administrator; eventually deciding the outcome of the company. Whether the company enters into a DOCA or goes into the liquidation stage is decided by the creditors’ majority vote. The principal goal for a company using a DOCA is to ensure a larger return to creditors than they could secure in liquidation. 

Liquidation
Liquidation occurs when a company is ‘winding up’ or finishing its operations. It involves a liquidator accounting all of the company’s assets, the company ceases to operate, and the distribution of funds to creditors and shareholders when possible. When a company goes into liquidation either by voluntarily electing or by court order, they generally won’t survive to stay in business in their current form. The liquidator’s prime task is to turn the company’s assets into cash, and share the proceeds between the creditors.

The distribution of these funds to the creditors is determined by the priority of interests stipulated in the Corporations Act 2001 but could be altered if there are secured interests involved. Normally, these creditors only salvage a portion of the debt owed to them by the company. Once all of the funds have been accordingly dispensed between the creditors and the activities of the company have been wound up, the liquidator will advise ASIC to deregister the company.