Insolvency Receivership/ Administration/Liquidation What’s the difference and how does it affect creditors? By Karl Hill is in serious financial trouble. However, a receiver acts only for the benefit of as an insolvency specialist it is sur- the secured creditor for whom it was (right) and prising how many of our clients do not appointed and not all creditors (although Shannon realise that there are some significant they are subject to specific duties). differences between liquidations, volun- In most instances a receiver will Martin tary administrations and receiverships, be appointed under the provisions of and the way that they affect creditors of a security instrument (such as a fixed a financially unstable company. and floating charge), which specifies the The appointment of an insolvency prac- powers of the receiver. Usually, a court titioner to a debtor usually strikes fear Receivership – it’s all about the bank order is not required for the appointment into the hearts of creditors, as it is con- The fundamental distinction between of a receiver. Depending on the nature of sidered to mark the death of the com- receivership and other forms of external the security, a receiver may be appointed pany with zero return on any outstand- administration is that receivers are usually to simply realise and sell the secured ing debts. It is true that the appoint- appointed by a secured creditor (such as assets, or to also take control of the ment of an insolvency practitioner is a a bank) for the purpose of ensuring that company from the directors and carry on real indication that the debtor company the secured creditor gets paid. Therefore, the business in the name of the insolvent FAQ’S – WHAT ABOUT THE CREDITOR’S RIGHTS? Just because a company is under external administration (in whatever form that may be) it doesn’t necessarily mean that creditors have no rights or options. The rights and remedies that creditors may have vary substantially depending on whether the company is in liquidation, voluntary administration or receivership. The following contains the answers to frequently asked questions about creditors’ rights, remedies and obligations in each of the forms of administration: Retention of title Administration: Yes, but not without the: director or close relative of the director Q: Can I recover my goods from the l administrator’s consent; or under a guarantee while the company is company which are covered by a retention l leave of the Court. in administration, except with leave of the of title clause in the agreement? Liquidation: Yes court. Receivership: Yes, provided that the Liquidation: Yes creditors’ rights are not compromised by Commencing or continuing legal the security. proceedings Preference claims Administration: No, unless: Q: Can I commence or continue recovery Q: Can I be pursued for any (alleged) l the goods are perishable; or proceedings for the debt owed by the preferential payments received from the l you have commenced enforcing your company? company (usually payments received 6 rights prior to administration; or Receivership: Yes months prior to appointment)? l the administrator has consented. Administration: Yes, but not without the: Receivership: No An administrator must not sell goods l administrator’s consent; or Administration: No subject to retention of title claims without a l leave of the Court. Liquidation: Yes, a liquidator can seek creditor’s consent or they must account to Liquidation: Yes repayment of preference payments from the creditor for the sale of those goods. creditors. Liquidation: Yes Recovery against guarantors Q: Can I take action to recover the Insolvent Trading Registering caveat debt owed by the company from the Q: Can directors be pursued for insolvent Q: Can I register a caveat against the guarantors? trading? company’s real property which is charged Receivership: Yes Receivership: No under the agreement? Administration: No, you cannot Administration: No Receivership: Yes commence recovery action against a Liquidation: Yes The above information should help creditors to understand their basic rights and options, but for specific advice on individual cases speak to an insolvency specialist to determine your true chance of recovery. A specialised knowledge of the intricate differences between receivership, administration and liquidation, together with an appropriately drafted credit agreement and guarantee could produce a recovery result when you might otherwise think all is lost. 8 CREDIT MANAGEMENT IN AUSTRALIA • July 2010 Insolvency company (as receiver and manager). The fate of the company is ultimately 1. realise all of the company’s assets While receivership is obviously not a good decided by the creditors at a meeting (turn them into cash); and sign for unsecured creditors, it is not which is convened approximately 26 days 2. distribute these funds among the necessarily terminal for the company. after the administrator’s appointment. company’s creditors. At a practical level however, it is not The decision of whether the company Once the liquidator has collected the unusual for an administrator or a liquidator goes into liquidation or enters into a funds, it will distribute those funds to the to be subsequently appointed to represent DOCA is determined by a majority vote of company’s creditors in the order of priority the interests of unsecured creditors while the creditors (based on both number and prescribed by the Corporations Act 2001 the company is in receivership. majority value holding) at this meeting. (Cth) (subject, of course, to secured A DOCA is, in simple terms, a flexible interests). The usual outcome is that Voluntary Administration – maybe it form of insolvency administration. It may creditors receive only partial payment of can be saved involve the company continuing to trade, the debt owed to them by the company. When a company is placed into the directors or other related parties After all of the funds have been administration it is either insolvent or on contributing funds or releasing claims, distributed among the company’s the brink of insolvency. Administrators are company debts being refinanced and/ creditors and the affairs of the company usually appointed by a resolution of the or assets of the company being sold. are finalised, the liquidator will deregister company’s directors, although they may The primary purpose of entering into a the company with ASIC. n also be appointed by a liquidator, secured DOCA is to achieve a higher return for creditor or the Court. the company’s creditors than they would Karl Hill is a Director and Shannon Martin is a Solicitor at Results Legal Solutions. On a practical level, there are usually receive in a liquidation. Shannon also co-authored the April article 1 two likely outcomes of a volountary entitled “Personal guarantees gone wrong”. administration which are: Liquidation – it’s dead www.resultslegal.com.au 1. strike a deal for the company to enter Once a company has been placed in FOOTNOTES: into a deed of company arrangement liquidation (voluntarily or by order of the 1 There is a third outcome – giving control back (“DOCA”); or Court) the prognosis is usually fatal. The to the directors. However, this outcome rarely 2. liquidation role of a liquidator in its purest form is to: occurs in practice. c-pulse 1372 c-pulse Australia Wide 1300 RLS LEGAL DEBT RECOVERY INSOLVENCY LAW COMMERCIAL DISPUTES resultslegal.com.au July 2010 • CREDIT MANAGEMENT IN AUSTRALIA 9.