What Is Receivership & How Does It Differ From Liquidation?

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When it comes to insolvency, there are two common processes the business could utilise to gain funds to pay off their creditors: liquidation and receivership. For those facing financial difficulties, prompt action is always pivotal and therefore it is important to understand how these processes might affect your business. This article will explain what a receivership is and how it differs from liquidation so that you have the knowledge needed to proceed appropriately and deal with financial trouble effectively.

What Is Liquidation?

Liquidation is the formal process of selling company assets and closing the business, usually after it has become insolvent (unable to pay its bills and debts). These assets are sold with the intention of clearing as many debts as possible. If any capital is left once creditors have been paid in the correct order, funds can then be distributed between shareholders.

Liquidation can take place on either an involuntary or voluntary basis. Where the former is concerned, a company will typically be issued a winding-up petition via HMRC and will enter into compulsory liquidation. Voluntary liquidation can take place via two different processes which will depend on whether the business is solvent or insolvent. Creditors voluntary liquidation (CVL) is the process used by directors of an insolvent company, whereas members voluntary liquidation (MVL) is the process used by directors of a solvent company, typically when owners wish to retire and extract assets in the most tax-efficient way possible.  

What Is Receivership?

Receivership, although similar to liquidation, holds several key distinctions that place it in a category of its own. During the process of receivership, a Receiver is appointed to take control of a company to secure the repayment of a debt to a secured creditor. A Receiver can be appointed for reasons, such as shareholder disputes, or poor cash flow management leading to defaults on loans. Unlike in a liquidation process, the business does not have to halt operations when in receivership but the Receiver has the power to manage projects to regain funds, liquidate assets, or, if need be, sell the business off entirely.

The appointment of a Receiver can be done by both the secured creditor (a Privately Appointed Receiver) or via a legal body (a Court Appointed Receiver). In both cases, a licensed insolvency practitioner can be appointed as the Receiver to oversee the process.

Receivership vs. Liquidation

In both liquidation and receivership, the aim will be to secure the best outcome for creditors. However, there are some key differences between the two processes. The most notable of these is that, when a company is placed into liquidation, directors will no longer have control of the management of the company. In receivership, the Receiver manages business assets but directors can still oversee the day-to-day running of the company.

Another difference between the two processes revolves around the roles of the liquidator and Receiver. The licensed insolvency practitioner acting as the liquidator is typically appointed voluntarily by a business, whereas the Receiver is appointed by an outside body which holds a right to recover money owed to themselves.

The implications of liquidation and receivership are also very different. Liquidation carries the implication of financial distress in a business and initiates the process of closing it for good. A receivership similarly implies financial failure but does not mean the end of a business entirely. Once the creditor has been compensated, the business can continue as normal.

If you find yourself unable to pay your debts when they are due and are facing receivership or considering liquidation, it is important that you seek professional advice as soon as possible. A licensed insolvency practitioner can talk you through your options as well as their implications so that you can act accordingly and proceed in the most suitable way for your business. Get in touch with the team at My Liquidation today for honest advice no matter your circumstances. 

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