The difference between administration and receivership

What’s the difference between administration and receivership? Keith Tully, partner at Real Business Rescue, explains.

The terms ‘administration’ and ‘receivership’ are very readily associated with one another, because they are both potential options when a company finds itself in acute financial distress. There are, however, a number of significant differences worth keeping in mind if your company is approaching insolvency.

Company administration

No business director envisages the day when an insolvency practitioner is appointed to assume control of their company’s assets and operations. But it is generally a much more preferable position to be in than to be taken straight into receivership, which typically results in the liquidation and dissolution of the company.

Administration protects a company from all legal actions that may be taken against it during a specified period of time (usually about 8 weeks). The appointed administrator will work to establish whether or not the company has any way of satisfying its creditors and, where possible, put a plan of action together to see it happen.

Entering receivership

A company can be forced into receivership when a creditor pursues the necessary course of action to see that happen, in response to the non-payment of a secured loan. Effectively, the law allows a creditor to appoint a receiver to one or more of a company’s assets to give it the best chance of recovering the amounts owed. However, the provision that a creditor can appoint a receiver under these circumstances has to be stipulated among the terms of the original secured loan agreement.

Unfortunately for an insolvent company on the wrong end of a receivership scenario, these situations can emerge quickly, with little warning or opportunity to react. This emphasises why it is so important for directors whose companies are facing serious financial difficulties to get the best advice available, and to act quickly, in an effort to protect their organisation while they can.

Administration options

Perhaps the most important point to have in mind regarding the distinction between administration and receivership is that the former still involves options and opportunities on the part of the insolvent company, whereas the same can’t really be said of the latter.

When an administrator is appointed to control the assets and operations of a particular company, he or she is legally obliged to act in the best interests of all creditors. However, from the perspective of the insolvent company, this is not necessarily the end of the story.

The administrator may, for example, determine that cash can be raised to satisfy creditors through invoice factoring, a pre-pack administration sale, or by some other means that the company’s directors had not previously considered, or been aware of. The result being that an organisation is able to continue trading and operating in some way, once the period of administration has expired.

Facing up to the issues

When faced with issues around financial distress, it is crucial that company directors tackle the problems they’re grappling with as early on as possible, and with clear guidance in support of that process. In many cases, the longer directors wait to take action, the fewer possible solutions are available once the realities of insolvency become unavoidable.

About the author

Keith Tully has been involved in corporate insolvency for over 20 years, and is experienced in advising company directors facing financial distress. Keith is a partner at UK corporate recovery firm Real Business Rescue, follow @RealBizRescue.