Liquidation, bankruptcy, receivership and administration

A company is a legal person with a life of its own. It can outlive its owners, and it can also die. Its death is not an accident of failure alone. A solvent company can choose to close, and an insolvent company can be rescued. The words used for these events, such as winding up, liquidation, bankruptcy, receivership and administration, are often mixed up, and examiners test the differences.

This topic sets out what each term means, who acts in each process and why. It also shows where the auditor fits in, because auditors are often the first to see the signs of failure and are asked for help when a company is in difficulty.

The key terms

A company is a legal person, separate from its members. Shareholders can sell their shares and the membership changes, but the company stays the same. Its existence ends only through winding up and liquidation, and the procedures differ depending on whether the company is solvent or insolvent.

Insolvency and illiquidity

The two ideas are different.

• Insolvency refers to an overall position of net liabilities in the statement of financial position.
• Illiquidity usually refers to current assets and current liabilities, which is today’s cash flow.

A company that is technically solvent may still have a liquidity problem in the short term if, for example, most of its assets are long term and a larger share of its liabilities falls due soon.

The syllabus names two main causes of insolvency:

1. Overtrading. The company cannot fund its current liabilities because of rapid growth.
2. A general long-term lack of profitability.

What a company in difficulty can do

When a company faces liquidity problems and possible insolvency, the practical next steps are one of these:

• wind up (close) the company; or
• try to save it, for example by appointing an insolvency practitioner to run the company and return it to profit during a period called administration.

The auditors can help. They know the company’s accounts and controls, and they are already assessing going concern each year. They can advise the directors on the position, on the cash flow forecast and on the options. They must take care over independence and over the limits of their role, as the directors, not the auditors, decide what to do.

Bankruptcy

Insolvency refers to the overall position of net liabilities. Bankruptcy is a legal declaration of inability to pay debts. A formal declaration often follows when a company becomes insolvent. Bankruptcy in Nigeria is described as governed by the Bankruptcy and Insolvency Act (Repeal and Re-enactment) Bill, 2016.

Background: That is a bill, not an Act. The older Bankruptcy Act of 1979 was the law on individual bankruptcy and reform bills have stalled several times, and a 2025 bill to replace it with a business insolvency and restructuring law is before the National Assembly. No source checked shows it has become law, so check the current position before relying on this.

Corporate insolvency is dealt with in the Companies and Allied Matters Act 2020 (CAMA 2020), mainly in Part B of Chapters 17 to 27 (see the table below). Nigerian usage often keeps “bankruptcy” for individuals and “insolvency” for companies, so use the word in the question.

Winding up and the liquidator

Winding up may be voluntary or compulsory. It may or may not involve bankruptcy, depending on whether the company has become insolvent.

• Voluntary winding up. The company is wound up without any intervention by the court.
• Compulsory winding up. The court orders it after a petition that the company should be wound up.

In either case a liquidator is appointed. The liquidator realises the company’s assets, pays the creditors and distributes any surplus to the shareholders.

Background: In a voluntary winding up of a solvent company, the members decide to wind up and the directors normally declare that the company can pay its debts. This is often called a members’ voluntary winding up. If the company cannot pay its debts, creditors have a say in choosing the liquidator, which is called a creditors’ voluntary winding up.

Where the law gives some creditors priority, such as employees for unpaid wages, those preferential creditors are paid before ordinary unsecured creditors.

Receivership

Receivership is often connected with winding up, but it is not necessary to wind up before a receiver is appointed.

A receiver is appointed by a creditor, or by the court on behalf of a creditor, to realise secured assets and use the proceeds to pay a secured debt. The usual case is a fixed charge over a non-current asset or several of them.

The receiver is normally appointed under the terms of the debenture that created the charge, often when the company is in default on payment of interest or capital. The powers of the receiver are set out in the debenture.

• The receiver’s function is to realise the charged asset and pay the creditor who holds the fixed charge. Any surplus is paid to the company or its liquidator.
• A receiver acts only in the interests of the creditor with the security.
• When that creditor has been paid in full, the receiver either allows the directors to resume full control, or, if the company is being wound up, hands over to the liquidator.

Administration

Some companies are in difficulty but could recover if given time. Many countries have a process other than winding up that gives the company a chance to trade out of its difficulties, so that it can eventually pay its creditors in full and continue in business.

• In the United Kingdom (UK) it is called administration. An insolvency practitioner takes charge for a period.
• In the United States (US) it is Chapter 11 of the Bankruptcy Code, and companies are said to seek “Chapter 11 protection”.

Background: CAMA 2020 introduced administration and company voluntary arrangements in Nigeria, in place of a system that mostly led to liquidation. The administration provisions are modelled on the English Insolvency Act 1986. A company voluntary arrangement is an agreement between a company and its creditors to restructure or settle its debts, and it runs without winding up the company. The sections are given in the table below.

The processes side by side

Where each process sits in CAMA 2020

CAMA 2020 also says that only licensed insolvency practitioners may act as liquidators, administrators or receivers. The Insolvency Regulations 2022 are made under the Act by the Corporate Affairs Commission.

The rules in more depth

Why the distinction between insolvency and illiquidity matters

A company with valuable property and little cash can often be saved by raising a loan or selling an asset. A company with net liabilities and falling profit usually cannot. The auditor’s going concern work looks at both, and the right remedy depends on which problem exists.

Whose interests does each person serve?

The liquidator acts for the creditors as a whole and then for the shareholders. The receiver acts only for the secured creditor who appointed the receiver. The administrator tries to rescue the company or give creditors a better result than liquidation. The exam often turns on this, so name the interest each serves.

Investigating a liquidation or bankruptcy

The syllabus asks about investigations into liquidation and bankruptcy. Background: Typical methods are to review the books and records for the period before failure, find the causes, trace the assets, test transactions with directors and related parties, look for payments that favoured some creditors just before failure, and identify losses and any fraud.

The earlier topic on investigations gives the stages, and the forensic topics later in the course deal with fraud evidence.

Worked example: a failed manufacturer

Scenario. Kano Metals Ltd is insolvent. Its property of ₦45 million is subject to a fixed charge of ₦40 million in favour of its bank. Its other assets realise ₦35 million. The liquidator’s costs are ₦8 million. Unsecured creditors are owed ₦120 million. Shareholders will receive nothing.

Step 1: the receiver. The bank appoints a receiver, who sells the property for ₦45 million, pays the bank ₦40 million and passes the surplus of ₦45 million − ₦40 million = ₦5 million to the liquidator.

Step 2: the pool for unsecured creditors. The liquidator has ₦5 million + ₦35 million = ₦40 million. After costs of ₦8 million, ₦40 million − ₦8 million = ₦32 million is left.

Step 3: the dividend. The unsecured creditors are owed ₦120 million, so they receive ₦32 million ÷ ₦120 million = 26.7 kobo in the naira. The bank is repaid in full because of its charge. If preferential creditors exist, they are paid before the ₦32 million is shared, and the dividend falls.

Illiquid but solvent. Compare Bata Foods Ltd, which has total assets of ₦800 million and total liabilities of ₦700 million, so it is solvent. But its current assets are ₦150 million and its current liabilities are ₦400 million. It cannot pay its short-term debts when due, so it is illiquid. Raising a long-term loan against its property would cure the problem. Winding up would be wrong.

How to score full marks

• Define each term in one sentence. Then give the difference from the nearest term.
• Name who acts and for whom. Liquidator, receiver, administrator.
• Keep solvent and insolvent apart. The procedures and the people differ.
• Use the facts. A scenario with secured assets points to receivership. One with a viable business points to administration.
• Add the auditor’s role. Going concern, advice and independence.

Common mistakes in the exam

• Using insolvency and illiquidity as if they were the same.
• Saying a receiver acts for all creditors. A receiver acts for the secured creditor.
• Saying winding up always means the company is insolvent.
• Forgetting dissolution as the final step.
• Forgetting that a surplus from a receiver goes to the company or its liquidator.
• Treating administration as the same as liquidation.

Quick revision

• Winding up, then liquidation, then dissolution.
• Solvent: can pay in full. Insolvent: cannot. Illiquid: short-term cash problem.
• Causes: overtrading, long-term lack of profit.
• Voluntary winding up: no court. Compulsory: court order. Liquidator realises, pays, distributes.
• Receiver: secured creditor, charged assets, surplus to company or liquidator.
• Administration: time to trade out of difficulty.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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