When a company gets into financial difficulty there are a number of things that could happen to it. The Directors could decide to place it into voluntary administration, it could be ‘wound up’ by creditors and placed into liquidation, there could be a voluntary liquidation or the company could go into receivership.
So what do all of the above terms mean?
Alternatively, a company is placed into voluntary administration to assess the company’s viability and whether the company can continue to trade and pay creditors. A company will be placed in administration when the directors of the company form the opinion that the company is insolvent (cannot pay its debts as and when they fall due), or is likely to become insolvent.
An administrator, who is a person external to the company, is appointed to manage the company in the interim. An administrator must be a registered liquidator. Similar to a liquidator, the administrator will take control of the company’s assets and affairs, report to ASIC, help prepare a Deed of Company arrangement, report to creditors and decide whether or not the company should be wound up.
Voluntary liquidation is when the members of the company no longer want the company to continue trading, but it is not yet insolvent.
Placing a company into liquidation
To put it simply a company is put into liquidation if it is insolvent and therefore cannot pay its creditors. A company can be wound up by either a resolution of its members at an appropriate meeting or by the court, usually on the application of one or more creditors of the company.
Once the company is placed into liquidation, a liquidator is appointed and it is the liquidator’s role to assess the assets of the company, sell those assets, report to ASIC and creditors and distribute funds to creditors and shareholders if possible and then deregister the company.
What is receivership?
By comparison, a company will go into receivership when an independent receiver is appointed by a secured creditor or, in rare circumstances, by the court, to take control of some or all of the company’s assets.
This is common when there is a charge over the company’s assets to secure a debt. The role of a receiver is to collect and sell enough of the charged assets to repay the debt owed to the secured creditor.
The appointment of a receiver does not mean the company folds. The company will generally continue to trade. The directors of the company remain, however their powers may be limited.