What is the Difference Between Receivership and Liquidation in England and Wales?

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. 

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.

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.

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.

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.

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