Business failure – the difference between Liquidation and Receivership explained
Many businesses start off with the best intentions when it comes to paying their creditors, but in these uncertain financial times it can sometimes seem all too easy to fall behind on payments. Often contractual agreements can go unsatisfied leading to creditors taking action to recover their losses. Many small businesses fall victim to liquidation and receivership in the UK every year, and although these two terms mean quite different things, the end result is usually the same; the sale of assets, in order to pay off as much of the debt as possible.
Receivership vs. liquidation
When a business has been struggling financially with seemingly no solution in sight, it can be placed in the hands of creditors and wound up by means of a formal insolvency procedure; this is known as receivership, and it's when a creditor takes control of a business and its assets with the intent of liquidating them. These creditors can then attempt to recover any money which they are due, and they can do this via the sales of a business and any applicable assets of that business. Liquidation on the other hand simply means the process of selling the assets.
In some cases, a business can be turned around when an administrator is brought in to take control, however, we'll mainly be looking at liquidation and receivership in this article. It is important for directors of struggling companies to know of these procedures and the effect they can have on their business, so if you find yourself in this unfortunate situation, please read on.
The process of receivership
Receivership generally involves bringing in a receiver who is appointed by a creditor in order to have the insolvent company's assets or properties seized, as long as these have been specified in a legal charge within the agreement of a secured loan. If the charge in question has specified a provision which enables express appointment, receivership can also occur very quickly and with very little warning. The receiver's specific rights and privileges will spring from the individual terms of the loan agreement in question, however, all receivers must follow the statutes laid out in Section 109 of the Law of Property Act (LPA).
Receivership vs. administration
For most companies, receivership is often the least attractive option, as there aren't really any advantages to this procedure and it will lead at the very least to loss of property, along with liquidation and the most likely dissolution of the company in question. Administration will only entrust the company to an experienced professional who can then work to escape insolvency while the company is in administration. Sometimes it can be possible to avoid receivership if your company goes into administration, providing the right steps have been taken, such as the sale of enough assets, or a pre-pack sale. It should also be noted that companies in administration cannot be forced into liquidation.
The difference between voluntary and compulsory liquidation
Voluntary liquidation falls into two different categories; members' voluntary liquidation or creditors' voluntary liquidation. This happens when a company goes through the resolution process and is brought about by a qualified practitioner. Compulsory liquidation, on the other hand, is put into play by a court order and may either be conducted by an Official Receiver or a qualified practitioner.
It should be noted here that the liquidators usually have first dibs on the company's assets in order to cover their fees, and after that the pecking order for who gains the leftover assets is really quite strict. Preferential creditors, like tax authorities, are usually first to claim assets, closely followed by banks which may have lent money to the business by way of secured loans.
Steps to take when facing receivership
If you find yourself facing receivership from either a creditor or , it can be an unpleasant experience and can lead to anxiety and stress. Nevertheless, it is essential that you should act very quickly, particularly if you have a loan agreement which enables express appointment. Do not wait to defend yourself, and take action immediately by getting in contact with a licensed insolvency practitioner to consider your options and the possible results and implications of receivership for your company. This could be the only way to avoid receivership, and it will be the most likely outcome if you do not seek assistance from an experienced professional.
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