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What is the Difference Between Receivership and Liquidation?

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In Short

  • Receivership is initiated by a secured creditor to recover owed debts by taking control of specific company assets.

  • Liquidation involves selling off a company’s assets to pay creditors and ceasing its operations.

  • The process can be voluntary (by directors or shareholders) or compulsory (court-ordered).

Tips for Businesses

If your company faces financial difficulties, consider receivership or liquidation as potential solutions. Receivership allows secured creditors to recover debts by taking control of specific assets. Liquidation involves selling off assets to pay creditors and ceasing operations. Seek legal advice to understand the implications and determine the best course of action.

When a company is struggling financially, they have several options available. One of those options is receivership and liquidation. This is particularly important if you are a secured creditor to a struggling or insolvent company or business. This will determine how the company will repay you. This article will explain some key features of the receivership process and how liquidation fits into the process.

What is Receivership?

Receivership is part of an insolvency process, where a company cannot pay its loans. Receivership is usually specified in a legal charge within a secured loan agreement. A secured loan is simply a loan backed up with collateral in the case of insolvency. 

Sometimes, a charge might contain a specific provision that accommodates for receivership happening very quickly. You should be aware of any clauses of this type, as they can sometimes catch the company or the creditors off-guard. 

A creditor will be able to appoint a receiver, who can manage the company’s assets during a restructuring or insolvency process. However, the receiver’s exact rights and obligations will depend on the agreement between the creditor, the receiver, and the company. Sometimes, you may also deal with court-appointed receivers. 

As part of their job in the insolvency process, the receiver will often have the power to collect and sell the assets as part of the secured loan agreement. For example, the receiver can take control of the company’s assets with the intent of realising a liquidation process. 

What is Liquidation?

Liquidation, sometimes called ‘winding up,’ is where a company’s assets are sold to pay off debts to creditors. There are two types of liquidation that a receivership process may invoke. These are:

  • creditors’ voluntary liquidation; or
  • compulsory liquidation.

Creditors’ voluntary liquidation involves the creditors when the company is paying off its debts. This can involve company directors and shareholders. The process will require a shareholders agreement and will end up with an appointed insolvency practitioner.

Compulsory liquidation is where a court will mandate liquidation, usually following a legal application for compulsory liquidation. 

If the company has over £120,000 in paid-up share capital, the case will go to the High Court. If it has less, the nearest court that deals with insolvency will usually handle the case. You can learn how much paid-up share capital a company has through the Companies House register.

If a company goes through liquidation, the company will cease to exist and will be removed from the companies register. 

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What is the Difference Between Receivership and Liquidation?

Receivership is the process through which a receiver deals with a company’s assets. The receiver will usually sell the assets, akin to a liquidation process, but has the power to deal with the assets in other ways. A creditor usually appoints receivers. Some key features include that:

  • the receiver can give the company back to shareholders and directors if the debts are settled without liquidation;
  • the receiver is someone looking out for the best interest of the company and the creditors, and is court-appointed;
  • in receivership, the company directors can still have some role in the debt restructuring process; and
  • in receivership, the company can continue to trade if the receiver decides that this is the best course of action.

Liquidation is where a company must sell their assets to pay debts, and can happen after appointing a receiver. Alternatively, a company’s shareholders can initiate liquidation rather than its creditors. For example, some key differences with receivership include:

  • liquidation does not offer the opportunity to give the company back to company directors. It instead always ends with the termination of the business;
  • a liquidator is only concerned with the interest of creditors and shareholders;
  • liquidation does not represent company director’s interests, but focuses on giving creditors and shareholders the proceeds of asset sales; and
  • a company in liquidation cannot continue trading.

At the same time, however, there are some similarities between the two. For example, in both liquidation and receivership, the goal is to pay off debts. The company’s management, in both processes, must step down and hand over control of assets to either the liquidator or the receiver. Finally, both a receiver and a liquidator will be responsible for filing regular reports to document the debt repayment process.

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Alternatives to Liquidation and Receivership

1. Restructuring Plan

Introduced in 2020, the Restructuring Plan offers UK companies struggling as a result of financial difficulties a flexible way to restructure debts and operations. It allows a company to propose a deal to creditors, with a unique ‘cross-class cram-down’ provision. This means a court can approve the plan even if some creditor groups disagree, provided it’s fair overall.

It’s particularly useful for larger companies with complex debt structures and while more adaptable than traditional insolvency methods, it can be complex and costly due to court involvement. The process unfolds over several months, encompassing court hearings, creditor meetings, and culminating in a final sanction hearing.

2. Moratorium

The moratorium procedure, also introduced in 2020, gives struggling UK companies a 20-day “time out” from creditor actions. If needed, this period can be extended with creditor or court approval. During the moratorium, directors retain control, but an insolvency practitioner (‘monitor’) oversees the process, and importantly, the company cannot face legal action without court permission, allowing time to explore rescue options.

To obtain this relief, directors must file court documents stating the company is insolvent or likely to become so, and include an insolvency practitioner’s consent to act, who must also confirm there’s a good chance of rescuing the company.

Importantly, the process provides valuable breathing space for renegotiating with creditors or raising funds, without the stigma of traditional insolvency procedures.

Key Takeaways

Receivership and liquidation are both parts of the insolvency process of a company. They are both concerned with paying off debt, and a receiver can initiate liquidation. 

If you are a secured creditor, the power to appoint a receiver will be valuable, as it gives you some say over company assets. As a secured creditor, you will have priority over the proceeds from an asset sale over unsecured creditors. Receivership can also offer more options than liquidation in terms of possible solutions to a debt problem. 

If you need help with receivership or liquidation, our experienced disputes lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

Who is eligible to apply for a moratorium?

Most UK companies that are insolvent or likely to become insolvent can apply for a moratorium, provided they have not been in insolvency proceedings in the last 12 months. However, certain financial institutions and companies with large capital market arrangements are typically excluded.

What is a ‘cross-class cram-down’ in a Restructuring Plan, and how does it work?

A ‘cross-class cram-down’ allows a court to approve a Restructuring Plan even if some classes of creditors vote against it. This can happen if at least one class that would receive payment in a liquidation approves the plan, and the court is satisfied that the dissenting classes wouldn’t be worse off under the plan than in liquidation.

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Kamila Oliwa

Kamila Oliwa

Trainee Solicitor | View profile

Kam is a Trainee Solicitor within the Corporate and Disputes teams who assists with a wide range of corporate matters as well as corporate and commercial disputes.

Qualifications: Bachelor of Laws, Swansea University.

Read all articles by Kamila

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