31 January 2024

What is the difference between receivership and liquidation in NZ?



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A creditor's ability to recover debts varies depending on whether the company goes into receivership or liquidation.
New Zealand Insolvency/Bankruptcy/Re-Structuring
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If a company that owes you money goes into receivership or liquidation, you need to know how this may affect you. Some key differences between receivership and liquidation will impact creditors. This article examines what happens when a company can no longer pay its debts when they are due and what it means for you as a creditor.

What is Receivership?

If you have a binding contract with a company, that contract contains provisions allowing you to take security over the company's assets. Likewise, you will be a secured creditor or lender if they fail to pay you under the agreed terms.

Receivership allows a secured creditor to recover the debt owing to it by appointing a suitably qualified and independent 'receiver.' This receiver will collect and sell the secured asset that is the subject of the security and receive an amount from its sale. This is known as realising an asset. Alternatively, a court may appoint a receiver, which will become public via a notice.

After a receiver realises the assets, the proceeds will first go to the receiver to recover their costs and fees. It will then go to priority claims (known as preferential creditors), such as:

  • unpaid wages;

  • bills; and

  • taxes.

Any leftover assets will then go to repay the secured creditor.

For example, a company provides a loan of equipment or machinery to another company (supplier). Here, they might secure their interests with a charge over the renting company's interests. Suppose the company giving the security by renting the equipment fails to keep up with repayments. In that case, the supplier can appoint a receiver to sell the secured asset to repay its debt.

What Does Receivership Mean for Me?

If you are a secured creditor, you may be able to resolve your outstanding debt without going to court. You can negotiate a repayment schedule where the company repays you in instalments. Alternatively, you can request the appointment of a receiver. More than one receiver can be appointed at any one time.

If you are an employee of a company that goes into receivership, you will be a preferential creditor and have a priority claim. The receiver will pay out any priority claims before paying a secured creditor.

If you are not a secured creditor or a preferential creditor, it is unlikely that you will receive any payments from a receiver. However, if a company survives receivership and continues to operate, you may be able to recover your debt.

What is Liquidation?

A company will go into liquidation when it is unable to pay its debts (compulsory liquidation) or if the shareholders no longer wish to continue trading (voluntary liquidation). A liquidator will be appointed either by:

  • court order; or
  • a resolution by the company's creditors, shareholders, or board of directors.

Similar to receivership, the appointment of a liquidator will become public. A liquidator will investigate the company's financial affairs and establish why it cannot pay its debts. After this, it will freeze and take control of the company's unsecured assets and sell these to pay unpaid debts to creditors. Anything remaining will go to shareholders.

What Does Liquidation Mean For Me?

Unlike receivership, as a creditor, you will have limited control over the liquidation process. Once a liquidator is appointed, the company must cease trading. Depending on the amount of proceeds from the sale of assets compared to how much the company owes its creditors, you may only recover some or none of your debt.

Difference Between Receivership and Liquidation

The table below outlines some key differences between receivership and liquidation.

Difference Description
Who Makes the Appointment A secured company creditor will appoint a receiver via security provisions within a pre-existing binding agreement or by a court.

Company directors or shareholders will appoint a liquidator, or a court can do so following the application of a company creditor.
Who They Act For A receiver acts for the secured creditor who appointed it.

A liquidator acts for all unsecured creditors.
Powers A liquidator has much broader powers than a receiver and can investigate the financial affairs of the company. It can also look into the conduct of the directors.

A receiver does not have this power.
Where Payment Goes A receiver takes control and sells only those assets required to repay the debt of the secured creditor who made the appointment.

A liquidator takes control of all company assets and sells them to repay monies owed to all creditors.
Ability to Operate If a company goes into receivership, it may continue to operate once it has paid all its claims and debts to secured creditors.

At the end of the liquidation process, the company can no longer trade and will be removed from the Companies Register.

Despite these differences, receivership and liquidation outcomes are often very similar since the assets secured under a receivership may be all of the company's assets. This means that the receiver takes control of all assets. Similarly, there may not be enough assets to fully repay the secured creditors. Here, if you are an unsecured creditor, you will not receive repayment.

You should also note that receivership and liquidation are not mutually exclusive. Accordingly, both processes can occur at the same time. More often, though, liquidation will follow receivership.

Key Takeaways

As a creditor, your ability to recover your debt will vary depending on whether the company that owes you the debt goes into receivership or liquidation. Receivership happens when one or more of the company's secured creditors appoint a receiver to collect and sell a company's assets to repay the debt of the secured creditor(s) who made the appointment. Liquidation involves winding up a company's operations and liquidating all assets to repay its debts.

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