You are on page 1of 30

Liquidation and Receivership

Objective: distinguish
between Liquidation and
Receivership.
• When looking at the success or
failure of a business we use
words such as solvency and
liquidity.
• Liquidity may be seen as an
firm’s ability to meet its current
payments as they become
due.(current debts)
• Solvency may be seen as an
entity’s ability to generate
enough cash to repay long-term
debts as they mature (fall due).
Definition of insolvency
• In legislation “insolvent” is
defined as a person or business
who is bankrupt and who is for
any reason unable to meet his
obligations as they become due.
Definition of bankruptcy
• When looking at the concept of
business failure we should look
“bankruptcy”.
• Bankruptcy may be seen as a
person or business that cannot
honour its obligations.
• Lets then look at “act of
bankruptcy”



Act of Bankruptcy
A business may be considered to have
committed an “act of bankruptcy” when
- The business gives notice to its creditors
that it has suspended payments of its
debts
- The business ceases to make payments on
its liabilities when they fall due
- The business calls a meeting with its
creditors and presents a written statement
of its inability to pay its debts.
Definitions of Liquidation
• Liquidation is the process of
converting securities or other
property into cash.
or
• Liquidation is the process of
taking a business’ real assets
(fixed assets) and turning them
into cash, either to pay off debt
or to reap a personal profit.



Benefits of Liquidation
• Liquidations are often a wonderful
source of money to buy new
equipment (retool) and materials for
start-up companies or companies
looking to expand their business.
• Liquidation may also be done to pay
off creditors
• Liquidation may be done for personal
gain or profit
TYPES OF LIQUIDATION
• Liquidation may be done either
voluntarily by a company or
individual,
Compulsory liquidation or
winding up
Why voluntary
liquidation?
• Voluntary liquidation may be done
for a number of reasons. Some
companies elect to undergo
liquidation while their assets still
outweigh their liabilities, if they
believe their business will continue
to degrade.
• By selling off assets early, these
corporations may pay off creditors
and still give a final dividends for
shareholders.

• A corporation with liabilities
outweighing assets may also
undergo voluntary liquidation,
expecting a compulsory
liquidation should they fail to
pay off a significant portion of
their debt.
• This type of voluntary
liquidation is considered an
appropriate response to an
insolvent situation.
• Lastly, a recently acquired
corporation may undergo voluntary
liquidation as a way for the
investment group in charge of the
takeover to realize immediate profits
and to pay off their high-interest
bonds.
• This technique is often referred to as
asset stripping, and is looked upon
as an incredibly hostile technique.
What is Compulsory
Liquidation?
 Compulsory liquidation (or
compulsory winding up) - this is
when the court makes an order
for the company to be wound up
(a 'winding-up order') on the
petition of an appropriate
person.
Compulsory Liquidation

• The parties (appropriate persons) who are
entitled by law to petition for the
compulsory liquidation include:

 the company itself
(If you are a director or a shareholder and
you are also a creditor of your company,
you may wish to present a winding-up
petition on the grounds that the company
cannot pay its debts).

 any creditor who establishes a prima facie
case

In a nutshell:
• How does a bankruptcy or
compulsory liquidation happen?
 A petition made by you (in a
bankruptcy)
or
 A petition by one or more
creditors
Steps in liquidation
• Establish “grounds” of
liquidation
• Petition for “receiving order”
• Appoint receivers and official
receiver or receiver-manager
Grounds
The first step in the receivership
process is determining that the
business has committed an “act of
bankruptcy”. This include:
- The firm gives notice to its creditors
that its has suspended payments of
its debts.
- The firm ceases to make payments
on its liabilities when they fall due
- The firm calls a meeting of its
creditors and presents a written
statement of its inability to pay its
debts.
Petition for receiving
order
• Once an act of bankruptcy has
been committed a creditor may
file a petition for a receiving
order.
• Upon hearing the application
(i.e. petition for receiving order),
the court may either dismiss the
petition, or make the order for
winding-up or liquidation.
• The court may then give the
order for liquidation when the
firm cannot meet its debts.
• The court may dismiss the
application if the petitioner
unreasonably refrains from an
alternative course of action.

Appointing the Official
Receiver
• The Official Receiver may be notified
by the court of the liquidation
(bankruptcy or winding-up order).
• Official receivers are civil servants
They are attached to each court and
when a bankruptcy or compulsory
winding up is ordered one of them
may be appointed as official
receiver.


Official Receiver as a Liquidator

• In other words, the Official Receiver
may act as liquidator.
Role of Liquidator
• This person is responsible for the
winding-up of a company, taking
control of a firm’s affairs and
gathering assets with the view to
finding a buyer.
• The Official Receiver (Liquidator) is
also responsible for paying off any
debts the firm may have.
• We have just finished looking at
“liquidation”.
• Now let us look at
“Receivership”
Receivership
• This is the liquidation (selling)
of a firm’s assets by an
independent body following its
collapse.
• When a firm is being liquidated
administrator or administrative
receiver may be appointed.
• When in a state of receivership,
the owner(s) lose their
ownership of the firm (equity),
and moves into the hands of the
receiver (an independent body).
• When a business gets into
financial trouble an
administrator or administrative
receiver may be appointed.
Administrative receivership


• When a company borrows money,
the lender is usually given some
security over the company's assets
to guarantee payment.
• If the company fails to keep the
terms of the loan or encounters
financial difficulties, the lender may
be entitled to appoint an
administrative receiver.
Role of Receiver

• An administrative receiver is an
insolvency practitioner who has
control of the whole, or a substantial
part, of the company's property and
wide powers over the business.
• The administrative receiver is mainly
concerned with getting back the
money owed to the secured creditor.
The administrative receiver may sell
the assets piecemeal, or sell the
whole business as a going concern
to pay off the secured creditor, and
the costs of the receivership.

• The costs of liquidation are
normally taken directly out of
the company's assets.
• These costs include advertising
for the sale of the assets,
insurance to cover the sale, a
direct fee to the liquidator, and
costs for disbursing assets to
purchasers.
Role of receiver/receiver-
manager (in a nutshell)
• The duties of a receiver or
receiver manager are:
- Duty to take control of assets
- Duty to realise security interest
of the creditor for whom he has
been appointed
- Duty to carry on the business
What’s next after
liquidation?
• Having wound-up (liquidating) the
firm, the liquidator must call a final
meeting of the members (if it is a
members' voluntary winding-up),
creditors (if it is a compulsory
winding-up) or both (if it is a
creditors' voluntary winding-up).
• The liquidator is then usually
required to send final accounts to
the Registrar and to notify the court.
The company is then dissolved.
Assignments
• Further reading p. 373 – 392 Study Guide
• Maraval Company is in the process of acquiring
Gordon Limited, a company that has been
experiencing financial difficulties for several
months. The financial difficulties began with
working capital problems but escalated
recently when the company was unable to meet
its loan interest and principal repayments on its
long-term debt.

Describe Gordon Limited’s current financial
situation and give a justification for answer.
(past paper q. 2008)