Receivership and liquidation are both formal insolvency processes for companies in distress. However, they are not the same and have differing purposes. Commonly, people are confused by the differences and this blog will explore what they are.
Receivership
Receivers are commonly appointed as a manager overall a company’s property. This includes physical assets (motor vehicles, tools, plant, equipment), accounts receivable, cash, contracts. Most often the appointer is a bank or lender with a GSA over the debtor company.
There are rarer instances where receivers are appointed by the court or over specific assets (i.e., a retention fund). These are not common.
A receiver’s principal duty is to recover funds to repay their appointer’s debt. They can do this by selling assets, collecting invoices, or continuing to trade or selling as a going concern. The receiver has a general duty of care to the other unsecured creditors and to get the best prices reasonably obtainable for the things they deal with.
If there is no liquidator, they also have the responsibility of dealing with the preferential claims (i.e., staff for unpaid wage & entitlements) and the IRD.
Often a receivership appointed by a secured lender will prompt the shareholder(s) to appoint liquidators or liquidation will prompt a secured lender to appoint receivers to protect their assets/recovery.
Liquidation
Liquidators are commonly appointed by the shareholders of the company or by a creditor (via court application). The liquidator is then the ultimate agent of the company with all powers, rights, and remedies of the director. The liquidator also gets special powers to investigate, require documents, void transactions to make recoveries.
A liquidator’s principal duty is to preserve and protect the company’s assets to enable distribution to its unsecured creditors. They have a general duty to respect secured creditors’ assets, but secured creditors generally sit outside the liquidation.
Liquidators make recoveries and then distribute them to the company’s preferential and unsecured creditors. Unfortunately, the costs of the liquidator’s actions and investigation can outweigh the recoveries and there is no surplus for distribution.
The liquidator also has an obligation to supervise the conduct of any receiver and acts as a sort of ‘watchdog’.
Liquidator v Receiver
As mentioned above, the appointment of a receiver or liquidator can prompt the appointment of the other. This means that a company can have 2 sets of insolvency practitioners (and the associated costs) at the same time.
The liquidator is automatically the agent of the company with the authority to settle/bring claims. The receiver however can seek agency from the liquidator or be granted it by the court.
Often the interests of the liquidator and receivers are not aligned and there is a debate over who will do what works. In practical terms, there will be a cost advantage for the party appointed first being able to carry on works. This avoids wasted costs and the time associated with handovers.
Work is typically divided as thus:
- Physical assets (plant, equipment, vehicles) dealt with by the receivers
- Accounts receivable/inventory, legal claims and other residual matters dealt with the liquidators if there are preferential creditors.
This is the case where the company has preferential creditors (staff and IRD). This is because the accounts receivable and inventory are carved out by statute to satisfy preferential creditors first as opposed to a lender/GSA holder (there is a caveat regarding factored invoices and PMSI’s – but these are complex distinctions).
The receivers and liquidators in parallel appointments are required to act professionally and co-operatively with one another. This is usually the case.
If you have any queries about the roles of liquidators or receivers or would like to discuss a formal appointment, please do not hesitate to contact the team at Waterstone. Get in touch with us enquiries@waterstone.co.nz or 0800 CLOSED.
Learn about the Insolvency statistics across NZ here.
