When businesses in New Zealand face financial difficulties, they may enter into receivership or liquidation, two distinct processes that deal with insolvency in different ways. In this blog post, the experts from Principle Insolvency dive into helping understand the difference between the two and how to decide which one is best for you in your business.
What is Receivership?
Receivership is a process initiated by a secured creditor when a company fails to meet its debt obligations. In this scenario, a receiver is appointed to manage the company’s assets, sell them, and repay the creditor. The receiver’s primary duty is to the secured creditor who appointed them, and they are responsible for recovering as much of the debt as possible. The company may continue to operate during receivership, but the receiver has the authority to make decisions about which parts of the business to continue or discontinue.
What is Liquidation?
Liquidation, on the other hand, is a process that typically results in the closure of the company. It is often initiated by a court, the company’s shareholders, or its creditors when it is clear that the company cannot pay its debts. A liquidator is appointed to sell off the company’s assets, with the proceeds distributed among the creditors. Unlike receivership, liquidation signals the end of the company, and its business operations cease. The liquidator’s role is to ensure that all assets are sold, and the proceeds are used to pay off the company’s debts in a specific order, starting with secured creditors and moving on to unsecured creditors, and finally, if any funds remain, the shareholders.
Deciding Whether Receivership or Liquidation is Best for Your Business
When deciding between receivership and liquidation for a struggling business in New Zealand, it’s important to assess the company’s financial health and potential for recovery. Receivership is generally the better option if parts of the business are still viable and can generate revenue, allowing a secured creditor to recover some of the debt while possibly keeping the business or portions of it operational. On the other hand, liquidation is typically more appropriate when the company’s debts significantly outweigh its assets, with little to no chance of recovery. Liquidation involves winding up the company’s affairs, selling off assets, and distributing the proceeds among creditors, marking the end of the business. The choice between these two paths should be guided by the company’s long-term viability, with input from financial and legal advisors to ensure the decision aligns with the interests of all parties involved.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
In essence, the key difference between receivership and liquidation in New Zealand lies in the outcomes and responsibilities. Receivership is focused on recovering funds for secured creditors and may allow the company to continue in some form, while liquidation is geared towards winding up the company’s affairs and closing it down permanently. Understanding these differences is crucial for businesses and creditors alike when navigating financial difficulties. At Principle Insolvency, we can help you decide what is best for your business. Call Principle Insolvency today and let the professionals help.