Receivership vs Liquidation
It may be difficult to understand the difference between receivership and liquidation as they are terms that are very closely related to one another. Also, an overview on bankruptcy and insolvency is important to get a clear picture of these two terms, receivership and liquidation. A business faces insolvency when they are unable to meet their financial obligations. A firm that is insolvent has to get their affairs in order, sell their assets and make arrangements to meet their debt obligations. Receivership and liquidation are both processes that a company goes through in winding up business operations. While both receivership and liquidation 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 difference between receivership and liquidation.
What is Receivership?
Receivership is a procedure that is followed by a company that is facing a very high risk of insolvency or is currently under bankruptcy proceedings. The aim of a receivership is unique to each case and depends upon the needs of the party who appointed the receiver, who is usually either banks or creditors. A party known as the receiver is appointed by where a charge is created for all of the company’s assets including company goodwill. The receiver usually has control over some or a majority of the firm’s assets. The receiver is primarily responsible to the party by whom he was appointed and has to serve the interests and needs of the holder of the charge of the business’s assets. If the holder of the charge is a bank or creditor whose aim is to recover their dues, the main aim of the receiver is to sell off any assets and secure the best payout for the creditors. There is, however, a possibility that the receiver may run the company in the short term. This is with the aim of selling off the business as a going concern, to maximize the value for which the assets can be sold.
What is Liquidation?
Liquidation is the process that a company goes through when winding up operations. A company has to be liquidated because it is insolvent and is unable to meet financial obligations to its creditors. Liquidation can occur voluntarily or can be made compulsory as a result of declaring bankruptcy. The main aim of liquidation is to sell off the company’s assets and repay dues to all creditors. Creditors are paid out depending on the order of priority, where secured creditors come first in line. Compulsory liquidation can be ordered by a court of law where a court appointed party known as the liquidator takes charge of the company’s assets. On the other hand, a company may go into liquidation voluntarily if they feel that they should wind up the business as a going concern while their assets are still higher than their liabilities.
What is the difference between Liquidation and Receivership?
Receivership and liquidation are terms are that are very closely related to one another as they both describe a process that firms utilize to collect and sell off company assets, and utilize proceedings to meet the company’s financial obligations. A receiver is appointed by a specific secured creditor of the firm whereas a liquidator may be appointed by the court, shareholders or company creditors. The main difference between receivership and liquidation lies in the goals that each tries to achieve. The main aim of a receiver is to serve the interest of the one creditor by whom the receivership was initiated. On the other hand, the aim of liquidation is to meet financial obligations to all creditors of the company, in order of their priority. Receivership is primarily concerned with the one creditor who appointed the receiver, while liquidation takes into consideration all stakeholders, including unsecured creditors of the firm and strives to achieve an outcome beneficial to all. Another difference is that once the receiver is done with their job the company is handed back to the owners and directors, and technically can continue operations (even though they usually do not). However, with regards to liquidation, the company will be removed from the registrar of companies and completely closed down.
Summary:
Receivership vs Liquidation
- Receivership is a procedure that is followed by a company that is facing a very high risk of insolvency or is currently under bankruptcy proceedings.
- The receiver is primarily responsible to the party by whom he was appointed and serves the interests and needs of the holder of the charge of the business’s assets.
- Liquidation is the process that a company goes through when winding up operations. A company has to be liquidated because it is insolvent and is unable to meet financial obligations to its creditors.
- The main aim of liquidation is to sell off the company’s assets and repay dues to all creditors.
- Receivership is primarily concerned with the one creditor who appointed the receiver, while liquidation takes into consideration all stakeholders, including unsecured creditors of the firm and strives to achieve an outcome beneficial to all.