This is a distinction that commonly causes confusion. But the two situations are quite different, and in fact a company may be placed in liquidation while a receiver is in place over some of its assets.

Receivership

A receivership commences when, as a result of a default by the debtor company, a secured creditor appoints a receiver to control some or all of the company’s assets. The assets over which the receiver is granted control are generally defined in the security document, a General Security Agreement (GSA). Notice of the GSA is normally registered on the Personal Property Securities Register, by means of a Financing Statement.

When the receiver is appointed, control of the company is still nominally vested in the directors. However, the receiver is granted the power to manage the assets over which his appointor had been granted security by the company under the GSA. Most but not all GSA’s will give security to the grantee over all of the assets and undertaking of the grantor company.

In realising the assets secured to his appointor, the receiver is still bound by the preferences of the various classes of creditors as set down in the Seventh Schedule of the Companies Act. In particular, debtors and inventory are generally reserved for preferential creditors.

Once the receiver has realised sufficient assets to repay the debt owed by the company to the grantor, he must be released by the grantee. Control of the company assets remaining then reverts to the directors. Or, if a liquidator has been appointed, control of the remaining assets will be assumed by the liquidator.

Liquidation

A liquidation generally has the effect of immediately stopping the trading of the company, unless the liquidator has the capacity to underwrite any ongoing trading losses. Control is immediately relinquished by the directors.

The liquidator’s responsibility, as set down in the Companies Act, is to realise the assets and to make a distribution of the surplus remaining, after the costs of the liquidation, to the creditors. The preferences of the various classes of creditors are set down in the Seventh Schedule of the Companies Act.

Where there are assets over which securities have been granted by the company, the liquidator may only deal with those assets, in a way which does not compromise the rights of creditors secured over them.