Receivership vs Liquidation: What’s the Difference?

When the resolution process fails, the insolvency framework in India mandates that the company’s assets be liquidated. Receivership vs Liquidation are two processes for addressing financially distressed companies. This article delves into the distinctions between the Receivership vs Liquidation

What Is Liquidation?

The Insolvency and Bankruptcy Code, 2016 (IBC) does not define “liquidation”. According to Chapter III of Part 1 of the IBC, liquidation is a process that involves the sale of a company’s assets to pay off its debts and distribute the remaining assets among its creditors. 

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Types of Liquidation:

There are two types of liquidation – compulsory liquidation and voluntary liquidation. Compulsory liquidation is initiated by the National Company Law Tribunal (NCLT) as per the grounds listed under section 33(1) of the IBC, that is, no resolution plan is submitted, the NCLT rejects the resolution plan for the non-compliance, the Committee of Creditors (CoC) decides to liquidate the corporate debtor, by an application of the resolution professional, or the corporate debtor has contravened the provisions of the resolution plan. Section 59 of the IBC that voluntary liquidation proceedings are initiated by the corporate person who intends to liquidate itself voluntarily and has not committed any default.

Purpose:

Liquidation is initiated after the resolution process fails. Its main objective is to fairly distribute a company’s assets among creditors and to close the company.

Stakeholders Involved:

There are many stakeholders, creditors, the liquidator, the CoC, and the NCLT. Creditors receive a portion of the company’s remaining assets, based on the priority order under section 54, to partially or fully recover the debts owed to them when the company’s assets are sold. The liquidator is appointed by the NCLT to manage the entire liquidation process and to sell a company’s assets to pay off its debts. The CoC has the decision-making power during CIRP to liquidate the corporate debtor. Upon CoC’s decision, the NCLT will then either approve or reject this decision. The NCLT has the responsibility to oversee the liquidation process, actions of the liquidator and other stakeholders, verifying creditors’ claims, etc.

Key Outcomes:

The last stage of liquidation is dissolution. Under section 54 of the IBC, the company will cease to exist and the name of the company will be struck off from the Registrar of Companies.

What Is Receivership?

Receivership is a legal state under the Presidency Tpwns Insolvency Act, 1909 that occurs when a third party, the receiver, is appointed to manage or sell specific assets of an insolvent debtor. The company in receivership continues to exist and its directors can remain in office, although their roles are limited.

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Purpose:

The primary purpose of this process is to recover funds owed to secured creditors while potentially allowing the company to continue operations for a period. It involves liquidating the assets to distribute the proceedings fairly among the creditors when a company is declared insolvent.

Stakeholders Involved:

The court appoints the receiver, as per section 56 of the Act, upon declaring a person insolvent, or the State Government appoints an “official assignee”. The official assignee distributes the funds among the creditors according to their respective claims. Secured creditors are usually paid first because they have security over some or all of the company’s assets.

Key Outcomes:

During receivership, the company may continue to operate, but only the security creditors are addressed 

Key Differences Between Receivership vs Liquidation

Similarities Between Receivership vs Liquidation

Described under two different legislations, there are some common aspects of the two, such as:

Insolvency Context:

Both typically occur when a company is unable to meet its financial obligations.

Asset Realization:

In both processes, the Court appoints an individual, the receiver or the liquidation, to take control of the company’s assets to distribute them to creditors.

Role of Professionals:

A licensed insolvency practitioner is required for the execution of receivership or liquidation.

Legal Framework and Processes

Liquidation: 

Here mention about it governed by insolvency laws in most jurisdictions and it requires approval from creditors, shareholders, or courts depending on the type of liquidation.

Receivership:

The State Government appoints an official receiver for specific local areas, to take possession of an insolvent property and distribute it to creditors. When an order of adjudication is made, the insolvent’s property is vested in either the court or a receiver. Orders made under the Act are executed the same way as decrees for the delivery of property or payment of money under the Code of Civil Procedure, 1908. Secured creditors also have the right to appoint a receiver without involving courts.

Implications for Creditors and Business Owners

For Creditors:

As per section 53 of the IBC, during liquidation, all creditors share the proceeds based on priority, with secured creditors having higher priority than unsecured creditors. However, in receivership, only the secured creditor’s interests are prioritised.

For Business Owners:

When a business owner faces liquidation under the IBC, it means that there company is being dissolved to pay off creditors. On the other hand, receivership may allow partial operations and provide an opportunity for recovery.

Common Misconceptions

There are certain misconceptions of receivership and liquidation that causes confusion between the two processes, such as:

“Receivership means liquidation.”

Receivership is a process that can help creditors to recover secured debts while liquidation is the process of dissolving a company. Receivership only deals with secured debts, whereas liquidation addresses the entire company.

“Companies can recover after liquidation.”

Liquidation results in the dissolution of a company. The assets of the company is liquidated and its name is struck off in the Registrar of Companies, this makes recovery of the company impossible.

Case Studies and Examples

For Liquidation: 

A dissolution order is passed by the NCLT after liquidating the assets of the company. The NCLT passed a liquidation order on December 16, 2016 for Cox and Kings Limited, after initiating the CIRP on October 22, 2019.

For Receivership:

In Tahsildar Vs. the Canara Bank, the Debt Recovery Tribunal appointed a court receiver who took possession of the property. This case shows how a secured creditor can recover their debts through the appointment of a receiver.

Conclusion

Therefore, liquidation and receivership are distinct processes addressing financial distress in businesses, each with unique purposes and outcomes. Liquidation focuses on selling off all company assets to pay creditors and dissolving the business, while receivership aims to temporarily manage and preserve specific assets for the benefit of secured creditors. This potentially allows the company to restructure and continue operating in some form. In brief, liquidation is about ending the business and receivership can be a step towards potential rehabilitation. 

Frequently Asked Questions (FAQs)

Can a company recover from receivership?

Yes, a company can recover from receivership because it can be a temporary measure to restructure finances and allow the company to regain solvency. 

Does liquidation affect the personal assets of directors?

Liquidation generally does not directly affect a directors personal assets unless there is evidence of fraudulent trading, misfeasance, or breach of fiduciary duty by the director.

Who appoints a liquidator and receiver?

The liquidator is appointed by the NCLT and the receiver is appointed by the court or the State Government.