Administration vs Receivership: Understanding the difference
When a business faces financial issues and struggles to fulfil its financial obligations, such as paying its debts on time and covering its wages bill, it may be considered to be insolvent, which can lead to tough decisions about its future being needed.
A clear understanding of the administration and receivership processes can help businesses decide on their best course of action, if they experience financial issues. Each process has different implications for the business, its stakeholders and creditors. Both involve an external party taking control of the business, but the methods and outcomes differ significantly.
In this article, we look at both administration and receivership, exploring the key differences to help struggling businesses better navigate difficult times.
What is administration?
Often viewed as a favourable alternative to liquidation, administration is a formal insolvency procedure that aims to rescue the business or achieve better outcomes for creditors. It may involve restructuring the business, looking for new investment or selling assets to maximise returns for creditors.
When is administration used?
Administration is the preferred process when a business has hit financial difficulties but still has the potential to be saved. It can be used:
- When a business is unable to pay its debts on time, and in full, and needs time to restructure or sell assets to raise the capital required to pay creditors
- To prevent aggressive creditor actions such as winding-up petitions
- If a business is still viable but requires expert guidance and management to turn things around and rescue it.
What happens after administration?
After a business enters administration, a licensed insolvency practitioner is appointed as the administrator to control the business. They are responsible for taking the best course of action to ensure the best outcome for the business and its creditors. This may include:
- Continuing to trade while seeking new buyers or investment (if viable)
- Taking cost-cutting measures to restructure the business and improve stability
- Selling the company
- Moving the Company to Liquidation to pay dividends to creditors before closing the business down
- Exit from administration and return to regular trading if the business can be turned around.
- Closure of the Administration with limited dividends paid.
What is receivership?
Receivership is a type of insolvency process used by a secured creditor, such as a bank or financial institution, where they appoint a receiver to take control of business assets, oversee their sale, and ensure that they (as the secured creditor) receive a dividend against the debt they are owed by the Company. A Receiver, does not act for the Directors or the preferential or unsecured creditors.
When is receivership used?
Receivership can occur if a business becomes insolvent or if a bank or other financial institution loses faith in the company’s directors. Common uses of receivership include:
- A secured creditor may enforce receivership to liquidate assets to recoup funds if the business is no longer viable
- The business fails to meet the payment terms of a secured load
- The lender loses faith in a business’s leadership and believes that selling assets is the only way to recover outstanding debts.
What happens after receivership?
Once the process of receivership has been initiated, a receiver is appointed to take control of the assets covered by the secured lender’s charge. For example, this could be the business premises. Following this, the next steps typically include:
- The sale of secured assets, such as property, stock, vehicles and machinery
- The receiver may continue to oversee the running of parts of the business to maximise the sales achieved of the secured assets.
- The company may be dissolved, meaning it will no longer exist or trade.
Key differences between administration and receivership
There are several key differences between administration and receivership. One of the biggest is the main aims of the financial procedure. Administration is a formal insolvency process that is designed to rescue the business if possible while maximising returns for creditors. Meanwhile, receivership is solely focused on repaying a secured creditor with no attempt or obligation to recover or save the business.
The way each is initiated is also a key difference – the administration process can be requested by directors of the business, its creditors or the court, while receivership is always appointed by a secured lender like a bank.
Another significant difference between the two is the legal protection offered. Administration prevents creditors from taking further action while a recovery strategy is developed. In contrast, receivership does not provide this same level of protection and leaves the business open to further claims from other creditors.
Lastly, administration offers the chance to try to turn the business around through sale or restructuring, and receivership offers little chance of survival and is often the final step before liquidation.
Are you looking for administration or receivership guidance?
If your company is facing financial challenges and would like to speak to our friendly team for affordable and impartial advice, please contact Bridge Newland today on 0800 612 6197.
Our team of experienced Insolvency Practitioners are here to help you.
Categorised in: Administration News
