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Receivership Or Liquidation - Does It Make Any Difference?

18 August 2013

A company that owes you money goes into liquidation or receivership. Does it make any difference to you which it is?

The main differences between the appointment of a liquidator and that of a receiver are:

  • A receiver is appointed by a secured creditor of the company (often a lender) under a power contained in (usually) a security agreement. A liquidator is appointed by either the shareholders of the company, or by the court on application of any creditor of the company, in accordance with the liquidation provisions of the Companies Act 1993.
  • The receiver’s job is to take control of and sell only those company assets that have been pledged to secure the money owed. In most cases the amount owing will be a loan. In contrast a liquidator’s job is to take control of all the assets of the company and sell those assets to try and repay the money owed by the company to everyone, not just one particular creditor.
  • A receiver can continue to trade the company whereas (usually) a liquidator can’t keep trading. Trading an insolvent company, however, is risky so this doesn’t always happen.
  • In a receivership the company directors still have a role although it’s very limited because of the powers of the receiver to deal with the secured assets. In a liquidation situation the directors’ roles are effectively extinguished.
  • Once the receiver has done his or her job the company will come out of receivership and be handed back to the shareholders and directors. In theory the company can continue on, but usually doesn’t. Once the liquidator has finished, the company is struck off the Register of Companies and ceases to exist.
  • It’s possible for a company to be in receivership and liquidation at the same time. Whilst a company can only ever have one liquidator at one time it can have more than one receiver – which makes for a complex situation.

Often the outcomes of receivership and liquidation are very similar. This can be because:

  • The assets secured under a receivership may be all the assets of the company. When this happens, the receiver takes control of all of the assets, just as a liquidator would.
  • There may not be enough assets to pay the secured creditor’s debt in full. In this case the unsecured creditors (other than some preferential creditors) won’t receive any payment, either in receivership or liquidation, and in both the company will usually cease to exist at the end of the process.

So what are the practical differences if you are a creditor of a company that’s in receivership compared with a company in liquidation?

  • Generally a receiver is only acting for the secured creditor while a liquidator is effectively acting for the unsecured creditors. Unless you are the appointing secured creditor, or you are a preferential creditor (an employee), you are unlikely to receive any payments from a receiver.
  • In a receivership there are no meetings of creditors. In both receivership and liquidation situations, however, periodic reports can be accessed from the Companies Office website.
  • A receiver doesn’t investigate the affairs of the company and has no powers to bring the directors of a failed company to account. A liquidator does have this power.
  • Where necessary for the on-going trading of the company, a receiver may be more ready to come to a repayment arrangement with you than a liquidator.

So the answer to the question is - not as much difference between these two roles as you may think. Understanding the differences in the two processes, however, may help you to deal with each situation better and therefore have more of a chance of getting paid.

Geoff McDonald is a partner in the Commercial Corporate team at Norris Ward McKinnon. He specialises in all areas of company law including company insolvencies.