Administration and receivership: Understanding the main differences
For struggling businesses a number of solutions exist, but understanding them all is essential when deciding the best course of action.
Insolvency is very complex and is why many firms are urged to seek the advice of specialist practitioners should they find themselves in difficulty.
Both administration and receivership are options in such a situation but disparities exist between the two processes that need to be understood.
Administration should assist all creditors when a business is in trouble, rather than solely those which are secured.
Companies will also have time to act as creditors will wait to hear from an appointed administrator about the scale of the situation.
Such an administrator will look into ways that the situation could be managed and will recommend any alternative approaches that could be beneficial.
Essentially, the process is designed to give companies the greatest possible chance of not facing liquidation as aspects of the firm can be rearranged for financial gain.
Administration needs court intervention to occur – usually after a creditor or a company director requests it.
Once in place, an administrator will take control of running the business while the firm is protected from further legal action while this is taking place.
Insolvency specialists will look to run the company as a going concern so that the best possible returns for creditors can be achieved.
This can be a precursor to liquidation although if a buyer is found then debts can be settled and a company can exit administration before then operating as it did before.
A creditor or a bank will appoint a receiver to take charge of one or more of a company’s assets and these individuals will act in the interests of those who appoint them.
This means they attempt to recover the costs of what is owed usually by selling the assets.
Under such conditions, the business in trouble can still face liquidation and legal action, so it not guaranteed to avoid the untimely end of company.
Company directors will remain in position during receivership although their powers will decline significantly over the asset in receivership and the legal aspects of a firm are not affected, leaving them liable to face action.
As can be seen, there are widespread differences between the two approaches and the required methods will depend heavily on the situation at any given firm.
By Phil Smith