Receivership, liquidation and voluntary administration

When people say a company has "gone bust", they usually mean it is in receivership, or liquidation, or both.

Receivership

If you can't make the payments on your car, eventually the finance company will repossess it. Receivership is the business equivalent of that process.

It usually happens when a bank or financier that holds a security (debenture) over the assets of a company, decides that the company isn't able to pay back money owed. So it appoints a receiver to take control of the company.

The receiver acts for the bank or financier that appointed them, and does not recover money owed to other creditors.

Sometimes the receiver will keep the company trading. But if it's making a loss by trading, the receiver is quite likely to decide this will only make matters worse - so the doors are closed.

Liquidation

This means it's all over. The company will be wound up, with the assets sold, debts recovered and creditors paid some or all of what they are owed.

A liquidator is appointed by the High Court or by special resolution of shareholders to look after the interests of all creditors. There is a priority order for payouts:

1. Liquidator's fees and expenses.

2. Secured creditors: those who have loaned the company money with the assets of the company as security. This might be in the form of a mortgage over a building or piece of land, or a debenture (a loan secured by the assets of the company).

3. Preferential creditors (such as employees owed wages or holiday pay, and Inland Revenue owed GST and PAYE).

4. Unsecured creditors: customers and others who are owed money, goods or services, but who do not have a secured interest in the assets. To pay for something before you receive it is, in effect, to make an unsecured loan.

A liquidator may be appointed either before or after a receiver, but the requirements of the receiver take precedence.

Voluntary Administration

A new option called 'Voluntary Administration' has been available since 1 November 2007. Under this option if a board of directors thinks that its company is in trouble it can put the company under the temporary control of an independent administrator. The administrator takes full control of the company to try to work out a way to save either the company or its business.

Administration is intended to be a relatively short-term measure that freezes the company's financial position while the best option for the company's future is worked out. During this time creditors can't take back their goods, take legal action against the company, or take legal action against directors under personal guarantees.

The administrator's options and recommendations are voted on by the creditors. Usually this requires them to accept a compromise and to wait for at least some of their money. If the creditors don't like the rescue plan, or the company cannot be saved, it goes into liquidation.