Administration vs Receivership
Insolvency is when a business is unable to pay its creditors and meet their financial obligations. A firm that files for insolvency or is at high risk for facing insolvency can follow measures to handle their debts and either turnaround the business back to health or to make arrangements to meet their debt obligations. Administration and receivership are two such methods employed by firms facing risk of bankruptcy. While both measures are initiated during times of financial distress, the aims of each are quite distinct to one another. The article offers a clear overview of each procedure and explains the differences between administration and receivership.
What is Administration?
Administration is a procedure that is followed during bankruptcy. Administration is an alternative option to liquidation and offers the firm facing bankruptcy some relief by allowing the required protection to reorganize their activities and to identify and address any causes for their predicament. The aim of the administration is to avoid liquidation and to give the firm an opportunity to continue business. In the event that there is no option, but close down the business, the administration will try best to secure a better payout for the firm’s creditors and other stakeholders. An administrator will be appointed to manage on behalf of the firm’s creditors until a suitable course of action can be decided upon. This may include selling the business, selling company assets, refinancing, breaking down the firm into smaller business units, etc. A company will go into administration when either the company’s directors or creditors apply to the courts for an administration. Once sufficient evidence of insolvency is provided, the court will appoint an administrator. On the other hand, directors can also appoint their own administrator by filing necessary legal documentation.
What is Receivership?
Receivership is a procedure which is followed either during insolvency or when a firm displays a large risk and possibility to face bankruptcy. In a receivership, a receiver will be appointed by the bank or a creditor where a charge will be created for all of the company’s assets and goodwill. The receiver will then have control over some or a majority of the firm’s assets. The receiver is primarily responsible to the lender by whom he was appointed and will perform his duties in line with the interests and requirements of the holder of the charge. As such, the receiver’s main aim is to sell off business assets and recover money due to creditors. A receiver may however run the company in the short term with the aim of selling off the business as a going concern, thereby maximizing the value for which the assets can be sold.
What is the difference between Receivership and Administration?
Administration and receivership are procedures that are initiated when a firm is facing insolvency or is at a very high risk of facing insolvency in the future. While an administrator will be appointed by the court, or sometimes by the board of directors, the receiver will be appointed by the bank or a creditor who holds the charge over all the company’s assets and goodwill.
The main difference between administration and receivership lies in the goals that each tries to achieve. An administration will be initiated with the hope of avoiding liquidation altogether and providing some breathing room and protection from creditors to give the firm a chance to reorganize, refinance and find a way to continue to run the business. On the other hand, the main aim of a receiver is to serve the interest of the holder of the charge on the business’s assets, which would be to sell off the assets and return any funds due to the creditors. Receivership is primarily concerned with the creditors, while administration takes into consideration all stakeholders of the firm and strives to achieve an outcome beneficial to all.
Summary:
Receivership vs Administration
• Administration and receivership are methods employed by firms facing risk of bankruptcy. While both measures are initiated during times of financial distress, the aims of each are quite distinct to one another.
• Administration is an alternative option to liquidation and will offer the firm facing bankruptcy some relief by allowing the required protection to reorganize their activities and to identify and address any causes for their predicament.
• The aim of an administration is to avoid liquidation and to give the firm an opportunity to continue business.
• In a receivership, a receiver will be appointed by the bank or a creditor where a charge will be created for all of the company’s assets and goodwill.
• The receiver’s main aim is to sell off business assets and recover money due to creditors.
• Receivership is primarily concerned with the creditors, while administration takes into consideration all stakeholders of the firm and strives to achieve an outcome beneficial to all.