Administration’s primary goal is to help the company pay off their debts, thus avoiding entering liquidation – at least in the first instance. Receivership works to realise the assets of a company, to maximise the benefit for the secured creditors. Receivership will usually result in the company also entering liquidation at the same time.
In modern insolvency, receivership shows such a heavy bias to the secured creditor, that they are now only permitted to appoint administrative receivers in relation to floating charges created and registered before 15 September 2003. For charges created after this date, only the administration process may be used with the administrator owing a duty to all creditors, rather than just the secured creditor.
What is company Administration?
Administration is a favourable alternative to liquidation. A licensed insolvency practitioner is appointed as Administrator for a company facing threats from creditors. The Administrator takes control of the business operations, to act in the best interest of creditors. In entering Administration, a moratorium is also placed around the company to freeze all legal actions.
An Administrator can be appointed by the company directors, the secured creditor or even the company itself. Where receivership will often be terminal for the business, administration is widely viewed as the preferred rescue procedure. Administration typically delivers higher returns to creditors from company assets, and saves jobs where possible. You can find out more about the administration process with our seven key stages infographic.
What is Receivership?
Receivership differs from Administration, as the latter works to protect companies from their creditors. Whereas, Receivership is initiated by those creditors or banks that believe the business cannot pay its debts. Unlike in administration, directors cannot place their own company into receivership.
The direction the company will eventually follow is, ultimately, decided by the receiver. The receiver will also not often take advice from directors, and will investigate their conduct. However, receivership does not terminate the powers of the directors in relation to the company, but only the charged assets. This means that the directors still can, and usually will, need to place the company into liquidation to deal with any shell of a company.
Administration Vs Receivership
From a company point of view, there are few benefits to receivership. The business will likely not be rescued as it is, and the assets may be sold on at a reduced price to recoup as much as possible for the creditor, or bank, that appointed the Receiver. The directors may also lose employment, be investigated and unsecured creditors will, most likely, not receive their money back. However, the Receiver can act fast and, if the directors are not found guilty of misconduct, receivership can solve their difficult position and allow them to walk away.
On the other hand, there are still options for the company with administration. The appointed Administrator takes control of business operations and details a recovery plan, including paying off the debts (as much as is possible) and looking for opportunities that could save the company. These opportunities could include reviewing whether a company voluntary arrangement is a viable alternative to resolve the situation.
Although it is now seldom available as a remedy, it is important to be aware whether a secured creditor is able to appoint a receiver over your company. Due to the public image of administrative receivership, banks now prefer to appoint Administrators, even if they are able to appoint Receivers. This way, it appears they are still trying to help the business save jobs, rather than taking the company apart to ensure their debt is paid. In truth, it is far more common for a company to enter creditors voluntary liquidation than either of the above processes.