What is the Difference Between Receivership, Administration and Liquidation?

In Short

• Receivership: A secured creditor appoints a receiver to sell company assets and recover owed debts.

• Administration: An independent administrator manages the company to explore restructuring options or prepare for liquidation.

• Liquidation: The company ceases operations, and assets are sold to pay creditors, with any remaining debts written off.

Tips for Businesses

If your business is struggling financially, consult a qualified insolvency practitioner early. They can help assess your situation and advise on the most appropriate course of action, such as entering voluntary administration or negotiating a deed of company arrangement, to maximise the chances of recovery and minimise potential losses.​

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Table of Contents

• 1. Receivership
• 2. Administration
• 3. Liquidation 
• Key Takeaways 

Financial problems are a common challenge for many businesses. Even when your company is going through a difficult financial period, your creditors are still entitled to cover their money. Often, this situation can lead to the creditors, shareholders, or directors of the company deciding to go through a process called insolvency. In Australia, the Corporations Act offers several solutions for creditors and shareholders. The most common are receivership, administration, and liquidation. While they have some similarities, there are also important differences between them. This article will explore the difference between receivership, administration and liquidation.

1. Receivership

Receivership occurs when one or more of the company’s secured creditors appoint an independent ‘receiver’. A secured creditor has a legal claim on some or all of a company’s assets. For example, a bank providing a company loan will secure its interests with a mortgage or a charge over its assets. It will likely have a right to appoint a receiver to enforce its security interest if the borrower fails to repay the loan. Sometimes, a court might appoint a receiver in exceptional cases. The receiver’s role is determined by the terms of the relevant charge, like a mortgage or a fixed or floating charge on the company’s assets.

The receiver’s main job is to gather and sell the assets that the grantor of the security interest put up as collateral and use the money to pay back the secured creditor.

Receivers may also report any suspected offences the directors commit to ASIC. 

What Does This Mean for Me?

Receivership does not necessarily mean a company is about to close down. The company might bounce back after the receivership, with control returning to the directors. However, an administrator or liquidator might step in to represent unsecured creditors when a company goes into receivership. This can create extra challenges for a company aiming to resume normal operations.

Under receivership, the company still technically exists, and directors might remain in their positions with limited authority, unlike companies in administration or liquidation.

For unsecured creditors, a receiver may assist in recovering their debts. However, unsecured creditors will not get paid until after secured creditors. If the company survives receivership, it will either continue to operate or will have leftover funds to distribute to any unsecured creditors.

2. Administration

A company in administration is either insolvent or about to become insolvent. Often, this is a stage when your business might be in financial trouble or even trading while it cannot pay its debts. If a company is experiencing solvency issues, it can enter voluntary administration to stop trading and temporarily prevent further debts. 

Either a company’s creditors or directors can initiate administration. The company will appoint an administrator to study key aspects of the company, like its:

• finances; 
• management; and 
• processes. 

They share their findings and suggestions with creditors and report any wrongdoings they uncover to ASIC.

Voluntary administration does not cancel the company’s existing debts. However, it stops creditors and other stakeholders from taking legal action against the company until the administrator has decided how to proceed. Any existing legal proceedings do not continue during this time. Further, the administrator will inspect the company’s books and speak with creditors before recommending a course of action to the company.

What Does This Mean for Me?

Once your company goes into administration, creditors will receive notice that you have appointed an administrator. Creditors will typically meet within eight days of the administrator’s appointment. After the meeting, the administrator will prepare a report outlining the company’s financial position. Within 20 days of the appointment, another meeting will take place. At this meeting, creditors will have the opportunity to vote on the future of the company. 

Generally, the creditors will vote on whether the company should:

1. enter into a deed of company arrangement (an agreement between the company and the creditors setting out how the debt should be handled);
2. enter into liquidation (the administrator is unable to save the business, and the company must be wound up); or
3. return to the directors (generally, this happens when a company can continue to trade out of its debt position).

If your company returns to its directors, this is a positive outcome for both secured and unsecured creditors. It means that the company will be able to pay its debts.

3. Liquidation 

Liquidation involves winding up the company’s operations and appointing a liquidator. The liquidator will then:

• stop the operation of the business;
• take account of the company’s assets;
• sell off the company’s assets; 
• distribute the proceeds from the sale of assets between creditors;
• pay any remaining surplus to shareholders; and
• officially shut down the company.

Liquidation can be initiated by either: 

• creditors (via a court order); or 
• the shareholders of the company (by resolution). 

For creditors to a company in liquidation, the payment of their debt will depend on priority. A liquidator will pay debts in the following order:

1. the costs and expenses of liquidation;
2. outstanding employee wages and super;
3. outstanding employee benefits; and
4. unsecured creditors.

What Does This Mean for Me?

Unfortunately, liquidation will likely mark the final chapter for your company, and receivership and administration may follow. If your company enters liquidation, it is usually a sign that it will permanently close down. 

Further, you will have little control over the liquidation process. Your company must stop trading, and its assets will be in the hands of your liquidators. 

Long-Term Consequences

While receivership, administration, and liquidation are distinct processes designed to address a company’s financial distress, they can lead to long-term consequences for the business landscape:

• employees often bear a significant burden during these processes, facing job insecurity and potential loss of entitlements;
• in receivership, workers may continue their roles temporarily, but their future remains uncertain;
• administration offers a brief reprieve as the administrator assesses viability, but job losses are common if the company proceeds to liquidation. 
• suppliers and trade creditors also face challenges, with the potential for significant financial losses that can create a ripple effect throughout the supply chain; and
• for customers, especially those with ongoing contracts or warranties, these processes can lead to service disruptions and uncertainty about fulfilling obligations. 

Moreover, the reputation of the business may suffer if it comes out of receivership or administration, potentially leading to increased scrutiny from regulators and a loss of investor confidence. Directors and shareholders must navigate personal and professional ramifications, including potential reputational damage and, in some cases, personal liability.

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Key Takeaways 

Receivership, administration and liquidation are three distinct processes. Each can affect the future of your company and its ability to trade. Receivership occurs when one or more of the company’s secured creditors appoint an independent ‘receiver’ to collect and sell the company’s assets. In administration, an administrator is appointed to review the company’s affairs and propose a course of action. Liquidation involves winding up the company’s operations and liquidating its assets.  

For more information, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.