What is the Difference Between Receivership, Administration and Liquidation?

Summary

• Receivership allows a secured creditor to appoint a receiver to sell specific assets and recover their debt, prioritising that creditor over others.
• Administration places an independent administrator in control to try to rescue the company or achieve a better outcome for all creditors.
• Liquidation ends the company’s operations, sells all assets and distributes funds to creditors before the company is dissolved.
• This guide explains the differences between receivership, administration, liquidation and bankruptcy for Australian business owners, including how each impacts creditors.
• It is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on insolvency and restructuring.

Tips for Businesses

Understand which insolvency process applies, as each affects creditor recovery differently. Secured creditors usually have priority in receivership, while administration aims for a better overall outcome. Act early, seek advice and engage with creditors to improve recovery prospects and reduce personal and commercial risk.

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On this page

• 1. Receivership
• 2. Administration
• 3. Liquidation 
• Key Takeaways 
• Frequently Asked Questions

Receivership, administration, bankruptcy, and liquidation are different insolvency processes used when a business or individual cannot pay their debts, each affecting creditors in distinct ways. Receivership focuses on recovering a secured creditor’s debt through the sale of specific assets, administration aims to rescue or restructure the company to maximise returns for all creditors, liquidation ends the company and distributes its assets to creditors in a set order, and bankruptcy applies to individuals, where their assets are used to repay debts.   This article explains the key differences between these processes and how each one impacts creditors’ ability to recover what they are owed.

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.  

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Frequently Asked Questions