For those who have run a business, the terms receivership, administration, bankruptcy and liquidation are used widely to describe businesses that is in trouble. While these are all related to a certain degree, they are all different situations, that can result in different outcomes for business. In this article, we will discuss what it means for a company to go into receivership.
What is receivership?
Receivership is when a secured creditor, such as a bank, appoints a trustee to act as a custodian of company’s assets or business operations. This is essentially done to make sure the bank gets paid the money that they are owed.
Receivership’s are generally the consequence of being in serious debt, but can also be a result of:
- a company being unable to pay its debts;
- inadequate resources to cover the costs of making the business viable;
- bad financial management;
- lack of expertise in commercial operations and business practices;
- disputes between shareholders or directors of the company; and
- default on loan repayments to secured lenders.
Receivership is a unique form of insolvency, different to bankruptcy and administration. This is because a receiver does not affect the legal existence of the company and its directors remain in office, albeit with limited powers of decision making.
How are the funds distributed?
Once a receiver has recovered the debts of a business, they will be paid a fee for their services. Following this, the funds are then distributed based on the following criteria:
- The funds recovered from circulating assets, such as cash at bank, debtors and inventory are paid in employee entitlements as a priority and then the amounts owed to secured creditors;
- The funds recovered from the sale of assets which are non-circulating assets, such as land, real property, plant and equipment and motor vehicles are paid to secured creditors in which money is owed to.
- Any funds left over are paid to the company, or its external administrator, if one has been appointed.
The finalisation of a receivership is when there have been sufficient funds released to pay the secured creditor in full, or when all assets that have been warranted to be realised, have been.
What happens after receivership?
As there has been poor management of funds within the business up until this point, it is not uncommon for an administrator or liquidator to be appointed immediately to represent the interests of unsecured creditors while the business is in receivership.
However, if the business has not folded (ie. there has not been another external administrator appointed) and there are some assets that remain after the debts have been paid, the control is given back to the business’ directors to continue to manage.
It is critical for businesses to properly manage their finances and stay up to date with their debt. It can be a very challenging situation to ever come back from, if your business is placed into the restrictive environment of receivership. If you do find your business in a difficult situation or need to learn more about your options for debt recovery, speak with our team of qualified lawyers.