When a company is facing insolvency, you may hear two different terms thrown around, liquidation and receivership. While they both deal with insolvency, they differ in many different ways. It is helpful to understand the difference between the two though so that you know the implications of both of them as well as the outcomes. Principle Insolvency is here to talk about what the difference is between liquidation and receivership.
Liquidation
When a company is coming to the end of its rope, it often enters into liquidation. This is usually when the company can no longer pay their debts and is in insolvency. The entire point of liquidation is to sell off a company’s assets to pay off debts and then distribute what is left to the shareholders. Here is what the implications of a liquidation look like:
– Loss of Control: If a company enters into liquidation, management loses control, and all the control is turned over to a liquidator.
– Dissolution: The company will no longer exist as a legal entity once entering into liquidation.
– Job Loss: Almost all liquidations will result in the employees losing their jobs. The only time this doesn’t happen is when the assets are sold and will operate under the direction of new ownership.
– Creditors: During an insolvent liquidation, creditors aren’t paid their debts in full. They will have to write it off as a bad debt.
Receivership
If a company defaults on debts and obligations that are owed to a secured creditor, that creditor can then have the right to hire a receiver to help them get the debts that are owed them. Let’s take a closer look at the implications of receivership:
– Limited Scope: While it is common for a company that faces receivership to later enter into liquidation, receivership itself isn’t the dissolution of a company. It is a process where the only goal is to secure and realize assets that are held as security for a debt owed to a specific creditor.
– Focus on Creditor’s Interests: When a receive is appointed, it is their focus to home in on the best interest of the creditor that were appointed by. It is their goal to maximize the recovery of the debt that is owed to them.
– Business Continuity: During liquidation, a company will stop operations. That isn’t the case with receivership. The receiver can determine that the company can continue to operate depending on the viability of the company.
– Less Impact on Employees: There may be some restructuring or downsizing to help the business stay afloat, but there is less of an impact on employees with receivership than with liquidation.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
If your company is in trouble, you can turn to Principle Insolvency to help you move forward with the best possible options. If it is receivership, so be it. If you need liquidation, we have you covered. Call us today!