Do you know the difference between a company in administration, receivership and liquidation?

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In today’s current economic climate it is important for everyone doing business to know the difference between a company in receivership, a company in administration and a company in liquidation.

A Company in Administration

A company will be placed in administration when the directors of the company form the opinion that the company is insolvent, or is likely to become insolvent. An administrator, who is a person external to the company, is appointed to manage the company in the interim. An administrator must be a registered liquidator.

A voluntary administrator can be appointed in various ways:

  1. By the directors of the company;
  2. By a liquidator or provisional liquidator;
  3. By a secured creditor.

During the voluntary administration, an administrator will:

  1. Take control of the company’s assets;
  2. Investigate the company’s affairs;
  3. Report any offences to ASIC;
  4. Assist the directors to produce a Deed of Company Arrangement;
  5. Report to creditors on the best course of action which will provide the most lucrative outcome for the creditors;
  6. Call the requisite meetings of creditors in order to decide whether or not the company should be wound up and placed in liquidation or continue to trade.

During an administration creditors have 3 options moving forward:

  1. Accept a proposal for a Deed of Company Arrangement;
  2. End the voluntary administration and pass control of the company back to the company directors;
  3. Liquidate the company.

A Company in Receivership

A company will go into receivership when an independent receiver is appointed by a secured creditor or, in rare circumstances, by the court, to take control of some or all of the company’s assets.

Commonly, receivers are appointed by secured creditors pursuant to the terms of a charge (e.g. a mortgage, fixed and floating charge over the company’s assets, etc).

The role of a receiver is to collect and sell enough of the charged assets to repay the debt owed to the secured creditor.

The difference between receivership and other forms of external administration is that the appointment of a receiver does not affect the legal existence of the company. The directors of the relevant company still remain in office but their powers are limited depending upon the powers granted to the receiver and the extent of the assets over which the receiver is appointed.

A Company in Liquidation

Liquidation involves the process of winding up a company’s financial affairs in order to dismantle the company’s structure, undertake appropriate investigations and fairly distribute the company’s assets to its creditors.

Liquidation of a company will occur when:

  1. The company was unable to pay all of its debts when they became due (namely the company was insolvent)
  2. The company members wanted to end the company’s existence.

A company can be wound up by either a resolution of its members at an appropriate meeting or by the court, usually on the application of one or more creditors of the company.

Once a company is placed into liquidation, a liquidator is appointed. The role of a liquidator is to:

  1. Find and protect the assets of the company;
  2. Realise the assets of the company;
  3. Investigate the financial affairs of the company;
  4. Make appropriate reports ASIC and creditors;
  5. Distribute funds to creditors;
  6. Distribute funds to shareholders, only if a surplus of funds exists after all creditors have been satisfied; and
  7. Ultimately deregister the company.

If your company is experiencing financial difficulty, one of the three above options may be appropriate for your company. If you have any questions or need specialised help in the above, please don’t hesitate to contact me.

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