Very often in debt collection practice Liquidation is an event that commonly occurs when a business cannot pay its debts when they are due. It involves the formal dissolution of the insolvent company, distributing its assets to the claimants for example by selling off inventory at steep discounts. An independent trustee will oversee the process, and as Liquidation does not necessarily mean the end of the debtors business but a rational decision, it is often seen as a welcome and safe exit by its directors.
The advantages of Liquidation are as follows:
- An independent insolvency practitioner is appointed who controls the company’s assets
- The appointment of a Liquidator avoids personal liability in respect of unpaid tax liabilities
- Avoids the expense of a Voluntary Administration
The disadvantages of Liquidation are as follows:
- Directors do not have the opportunity to put forward a proposal to ensure the business and the company continues in existence
- The appointment is advertised
- Any dividends payable occur slower than if the company was placed into Administration
- The company is being wound up with no prospect of a turnaround
- Fire Sale conditions may occur
- Creditors and other stakeholders lose out as the company will not be continuing in existence
- Insolvent Trading and Voidable Transactions provisions are available, and the director and other related parties can be exposed
A receiver holds the custodial responsibility for assets and rights of the debtors business, usually appointed by the court or a secured creditor. The receiver is responsible for making payments if included in the judicial judgment. Receivership is typically a step taken prior filing for bankruptcy.
The advantages of Receivership are as follows:
- Avoid the expense of an Administration
- Receiver does not need to report to all the other creditors of the company, only their appointer
- Receiver has advantage of seven days rent free period in respect of property owned by others
The disadvantages of Receivership are as follows:
- The moratorium provided for in a Voluntary Administration is not available to a Receiver, and thus unsecured creditors are free to continue with recovery/enforcement action
- During the receivership, the director is no longer in control of the company’s business property and affairs
- Unsecured creditors do not get to control the process
- After discharge of secured creditor debt the company is returned to the director and the company may be vulnerable to some other form of insolvency administration
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