Glossary: Liquidation and Receivership Explained
Liquidations or receiverships can be an uncertain and complex matter for any stakeholders concerned. With the right independent expertise to guide you through the entire process, you can address the uncertainty that inherently exists in these situations. In this guide, we explain what liquidation and receivership is and how Perun Consultants is ideally placed to represent you in making use of these solutions.
What is liquidation?
When a company goes into liquidation its assets such as property and stock are generally “liquidated” into cash to pay its creditors or shareholders. A liquidator is appointed by either the company, its creditors or the court to take control of the company, deal with its affairs and wind it down in a systematic way. Liquidation of a company can commence for a variety of reasons and there are three types of liquidation procedure:
Members’ Voluntary Liquidation (MVL)
Whether the business has fulfilled its purpose or wants to cease trading, its members could appoint liquidators under a Members’ Voluntary Liquidation. To do this, the company must be solvent (with the directors willing to provide a declaration of solvency to that effect) and in a position to pay all its debts in full. Capital is returned to shareholders through the redistribution or liquidation of assets.
Creditors’ Voluntary Liquidation (CVL)
If a company is insolvent and unable to pay its debts as they fall due, the directors, with approval from the shareholders, can voluntarily bring the business to an end under a Creditors’ Voluntary Liquidation. Liquidators are appointed to take control of the company to prevent insolvent trading as well as realise its assets and distribute these to creditors. During this process, liquidators may investigate why the company failed and, if necessary, bring misfeasance proceedings against company officers and any preferred parties.
Court Liquidation (CL)
When a company is unable to pay its debts, a creditor can petition the court for it to be liquidated. The court can then, if appropriate, issue a winding-up order and appoint liquidators to take control of the business, bring it to a close and liquidate its assets for distribution to creditors. In both a Court Liquidation and Creditors’ Voluntary Liquidation, if there’s a risk that that the company’s assets are in jeopardy, a provisional liquidator would be appointed to take control in the interim before a creditors’ meeting or court hearing confirming the appointment of a liquidator.
The majority of insolvent liquidation cases in Hong Kong have historically been commenced by the court rather than voluntarily by the company. In most cases, the directors didn’t see the benefit of acting early to appoint external liquidators to help them resolve their company’s insolvent status. Many also attempted to trade out of the problem when it is not realistic to do so, resulting in accumulating more debt, dissipating further assets of the company and putting themselves at risk of potential insolvent trading claims.
We believe that companies experiencing financial distress and mounting debts would benefit greatly from seeking independent advice immediately to have a chance of rescuing the business from insolvency and liquidation. If a restructure isn’t viable, then starting the CVL process in a timely manner can help protect the value of the company’s remaining assets.
What is receivership?
In accordance with a debenture or a contractual agreement, if a business does not pay its debts when they are due, a creditor can launch a recovery procedure known as a receivership to recoup monies owed. However, unlike liquidations, receivership appointments have a specific focus on taking control of and realising specified secured asset(s) for the benefit of the secured creditor only. The scope of the receiver's authority and power is limited to that set out in the contract, and therefore the receiver has no right to manage the company’s affairs unless that right is expressly granted in the contract. Where receivers are appointed over the shares of a company, the receiver may (subject to any other terms of the security documentation), exercise all of the rights (such as voting) those shares possess.
An alternative route to receivership is via a court appointment. This can arise for numerous reasons including, for example, creditors asserting that they have a beneficial interest in specific assets of a company, or the need for an independent party to manage the company’s affairs while a shareholder dispute is being litigated. A receiver appointed via this route is an officer of the court, and not an agent of the party responsible for bringing the appointment application to the court. The scope of the receiver’s powers and authority are limited to what is set out in the court order. Therefore, the applicants should give careful consideration as to what it is hoped the receivership will achieve to ensure all the necessary powers are set out in the appointment order.
Appoint insolvency experts you can trust
At Perun Consultants, our team of specialist insolvency experts have decades of experience dealing with complex liquidation and receivership cases around the world including in Hong Kong, Singapore, the Cayman Islands and the British Virgin Islands, with every case being different and each having its own aspects to consider and deal with.
Backed by a hugely knowledgeable team with wide-reaching international experience, you can trust Perun Consultants to help you resolve your case quickly and appropriately.
If you would like to find out more about our service, please don’t hesitate to call us. You can find all our contact information here.