If a company that owes you money is in financial trouble, it is important to  understant what options the company can take. How the company decides to proceed will affect whether it is able to repay its debts. This article will explain three possible options the company can take:  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 is someone who has security over the company’s assets. For example, a bank who provides a loan to a company will secure their interests with a mortgage or a charge over the company’s assets. 

The appointed receiver then collects and sells the company’s assets to repay its debts. 

After collecting and selling the company’s assets, the receiver distributes the money it has collected to the secured creditors . It will also report any possible offences committed by the directors to ASIC. 

What Does This Mean for Me?

If you are an unsecured creditor, a receiver may not help you to recover your debts. This is because you will not get paid until all secured creditors have been paid. If the company survives receivership, it will either continue to operate or will have leftover funds to distribute to you and any other unsecured creditors. In this case, you may be able to recover your debt.

Sometimes, an administrator or liquidator will be appointed alongside the receiver. This could improve your chances of recovering your debts. 

2. Administration

Administration can be initiated by either the creditors or the directors of a company. A company in administration is either insolvent or about to become insolvent. This means that it cannot pay its debts. If a company is experiencing solvency issues, it can enter voluntary administration to temporarily stop trading and prevent any further debts.

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. 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?

If you are a creditor to a company that has gone into administration, you will receive notice that an administrator has been appointed. A meeting of creditors will take place within 8 days of the administrator’s appointment. After the meeting, the administrator will prepare a report setting out the financial position of the company. Within 20 days of appointment, another meeting will take place. At this meeting, you will have the opportunity to vote on the future of the company. 

Generally, you will vote on whether the company should:

  1. enter into a deed of company arrangement (i.e. an agreement between the company and the creditors setting out how the debt should be handled);
  2. enter into liquidation (i.e.  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 position of debt).

The company being returned to the directors is a positive outcome for both secured and unsecured creditors. This is because it means that the company will be able to pay its debts. If a company that owes you money enters administration, there may still be a chance that the company will be able to pay your debt. 

3. Liquidation 

Liquidation often follows the administration process. It can be initiated by either: 

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

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;
  • convert those assets into cash;
  • distribute the proceeds from the sale of assets between creditors and;
  • pay any remaining surplus to shareholders.

If you are a creditor to a company in liquidation, the payment of your debt will depend on your 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;
  4. unsecured creditors.

What Does This Mean for Me?

Unlike administation, you will have little control over the liquidation process as a creditor. There is no opportunity to enter into a flexible payment arrangement and the company must stop trading. This means that you could receive only some or none of the money the company owes you.

Key Takeaways 

Receivership, administration and liquidation are three distinct processes. As a creditor, each can affect your ability to recover your debt in different ways. Receivership occurs when one or more of the company’s secured creditors appoint an independent ‘receiver’ to collect and sell a company’s assets. In administration, an administrator is appointed to review a company’s affairs and propose a course of action. Liquidation involves winding up a company’s operations and liquidating its assets.  If you need help with recovering a debt, contact  LegalVision’s debt recovery lawyers on 1300 544 755 or fill out the form on this page.

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