Key Differences Between Receivership and Liquidation

For any business, owners find it of great importance to pay their creditors on time. However, falling behind on payments is not always unavoidable. This would lead to a breach in contract between the lender and borrower, often leading to the lender taking action to recoup the losses. 

Businesses that cannot stabilize financially are often subject to liquidation and receivership, and while both involve the sale of assets in order to help pay off the business’s debt, they actually have two different outcomes, the latter which you more likely want to avoid.

Receivership:

A receivership is a process in which a person or group is appointed as the manager of a person’s property, money, assets, or operations of a business. Receivership is often done during legal proceedings, with the intent of steering the company back on a profitable track and avoiding bankruptcy. The receiver will sell assets in order to make money to give back to the lender, and this can apply to any of the company’s assets from inventory to currency to the entire base of operations, if necessary. In a related move, roles of any executives, board of directors, and other governing bodies over the company are suspended until the company is no longer in receivership or closes down.

Often times, a company can be in a salvageable state once a receiver steps in to manage its assets. Companies who are facing financial ruin are often looking for Arizona receivers so that people with the experience of making sound business moves can steer their company in a proper direction.

The receiver observes your company on a monthly basis and releases a monthly financial report to your creditors, your company, and the court.

Compared to liquidation and even bankruptcy, receivership comes with less paperwork, fewer court hearings, and of course, a chance to salvage your business. Both you and creditors should prefer receivership as it is costs less for everyone involved.

The major downside to a receivership is that you hand over the ownership of all your assets to somebody else, uncertain that you will get them back. You very limited (if any) power in regard to what to sell and what to keep, as the receiver has full authority over the company’s assets.

Other downsides to receivership is that the receiver can opt to make abrupt changes to the company as other means to repay your debt. These changes come in the form of laying off staff and/or cutting wages and benefits.

Liquidation:

Liquidation is the closing of the company followed by the sale of the company or its assets. Liquidation allows you to sell inventory, products, assets, properties, and more to one or multiple groups of people in order to make money to pay off your debt.

There are two types of liquidation: Voluntary and compulsory; basically, liquidation that is either by your decision or the court’s. Voluntary liquidation, however, takes place when a business is reviewed by a qualified practitioner and they see no other means of salvaging a business. Compulsory liquidation occurs when the court or a court-ordered receiver reviews the business’s assets and comes to a conclusion that a liquidation is necessary.

The liquidator handling your assets will be the first to have a chance to purchase assets as a means to cover their fees. Next, your creditor is next to acquire assets to make back any lost money they lent. After that are any possible banks that might have lent the company in question one or more secured loans. From there, other companies have the chance to acquire whatever is left from your business.

Of course, the thing about liquidation that business owners do not like about it is the ceasing of operations. If keeping the company going is still in your plans, then getting a receiver to look over your company would be the better option. Liquidation, however, is a route that a select number of business owners take to no longer deal with financial burdens and want whatever is left of assets following the process.

Can A Receiver Use Liquidation?

A receiver can also opt to liquidate the company should they come to the conclusion that everything must be sold off to pay off your debt. Before that happens, though, research is done to determine what the company needs to do to soften the financial blow as much as possible.

Conclusion:

Both receivership and liquidation involve big decisions regarding your company, but if you are still interested in moving forward, looking for a receiver is the direction to go in. The best-case scenario for receivership is being able to sell assets that do not impact the company’s bottom line and to easily repay debt to your creditors.