Insolvency processes are frequently spoken about interchangeably. They are distinct, initiated by different parties for different purposes, and the differences matter to anyone who is a creditor, a director or an employee of an affected company.
Liquidation
Liquidation ends the company. A liquidator takes control, realises assets, investigates the company’s affairs and distributes proceeds to creditors by statutory priority.
It can be initiated by shareholders’ special resolution, by the board in defined circumstances, or by court order on the application of a creditor — commonly following an unsatisfied statutory demand.
Priority of distribution broadly runs: liquidator’s costs, then preferential claims (including certain employee entitlements up to a capped amount and certain Inland Revenue claims), then unsecured creditors, then shareholders. Secured creditors sit outside this, realising their security.
Unsecured creditors typically recover little or nothing.
Receivership
Receivership is initiated by a secured creditor under their security agreement, to realise the assets over which they hold security.
The receiver’s primary duty is to the appointing secured creditor, not to creditors generally. That is the key distinction from liquidation.
A receiver may continue trading the business where that maximises realisation, and receivership can run alongside liquidation, with the receiver dealing with secured assets and the liquidator with the rest.
Voluntary administration
Voluntary administration exists to give a company breathing space to determine whether it can be saved. An administrator takes control, and a moratorium restricts creditor enforcement action while a proposal is developed.
Creditors then vote on whether the company should execute a deed of company arrangement, be wound up, or be returned to the directors. A deed of company arrangement can allow the business to continue on restructured terms, which sometimes produces better returns to creditors than liquidation.
It is initiated most commonly by the board where directors believe the company is or may become insolvent. That is a significant point — it is a tool available to directors, and using it early preserves options.
Compromise with creditors
The Companies Act also allows a compromise to be proposed to creditors, binding them if approved by the requisite majorities. It is less formal than administration and can be a useful mechanism where the underlying business is viable.
Where directors stand
Directors’ duties do not end at insolvency — they intensify.
The duties most relevant: not to agree to the business being carried on in a manner likely to create a substantial risk of serious loss to creditors, and not to agree to the company incurring an obligation unless there are reasonable grounds to believe it can be performed.
Liquidators investigate director conduct and can pursue claims for breach. They can also seek to recover voidable transactions — payments and transfers made in the period before liquidation that preferred one creditor over others, or transactions at undervalue.
That last point catches creditors as well: a creditor who was paid shortly before a liquidation may be required to repay it.
Directors can also face banning orders prohibiting them from managing companies.
Where employees stand
Certain employee entitlements — wages, holiday pay and some other amounts — rank as preferential claims up to a capped amount, ahead of unsecured creditors but behind the practitioner’s costs and secured creditors realising their security.
Amounts above the cap rank as unsecured. Employees should lodge claims promptly with the practitioner.
What creditors should do
- Stop supplying immediately and take advice. Continuing to supply an insolvent customer increases the loss.
- Lodge your claim promptly with the practitioner, with documentation.
- Establish what security you hold — registered PPSR security interest, retention of title properly registered, a personal guarantee, or construction retentions held on trust, which sit outside the general asset pool.
- Recover goods where retention of title applies and is registered, moving quickly.
- Pursue guarantors, whose obligation is independent of the company.
- Attend creditors’ meetings where they are held, particularly in administration where you vote on the outcome.
Prevention
Almost all of a creditor’s position is determined before the insolvency: credit checking, trading terms with retention of title, PPSR registration, personal guarantees, and watching payment behaviour as an early signal.
Deteriorating payment behaviour appears months before failure, and it is the most reliable warning available.
The Companies Office publishes insolvency information and the register of companies in liquidation, and the Insolvency and Trustee Service publishes material on personal insolvency. Both free.
General information only, not legal advice. Take advice promptly on any insolvency situation.
