What is Provisional Liquidation?

What is Provisional Liquidation?Provisional liquidators are only appointed in liquidation, these are allowed under certain specific circumstances. The appointment usually takes place after a Winding Up Petition has been presented but before the matter is heard in court.

A provisional liquidator can be appointed by the court only after a winding-up petition has been presented (section 135(1), IA 1986). Provisional liquidation may be appropriate where there is a real concern that, between the presentation of the winding-up petition and the making of a winding-up order by the court, the company’s affairs will not be properly conducted or its assets will be dissipated. 

The appointment of a provisional liquidator is usually carried out under the insolvency act 1986, this effectively takes control of a company away from its directors. It is used as an emergency measure to safeguard the failing company’s assets.

During the period of a provisional liquidator’s appointment, the powers of the company’s directors are effectively terminated.

What does the provisional liquidator do?

The provisional liquidator only has the powers and functions conferred on him or her by the court and set out in the court order (section 135(4), IA 1986 and rule 7.35, IR 2016).

Generally, a provisional liquidator does not realise the assets of the company, or otherwise take steps to wind up the company as the reason for the appointment is the preservation of the company’s property.

One of the functions of a provisional liquidator may be to investigate whether the company’s property has been misappropriated or its business has been wrongfully conducted.

However, a provisional liquidator has no power to bring certain proceedings under the IA 1986, including claims for wrongful trading, transactions at an undervalue and preference (Re Overnight Limited [2009] EWHC 601 (Ch)).

Who can apply for a provisional liquidation?

An application to court for an order appointing a provisional liquidator may be made only after a petition for the winding up of the company has been presented at court, and then at any time before a winding-up order is made (section 135(2), IA 1986).

The following can apply to have a provisional liquidator is appointed:

Creditors

If a creditor believes company assets may be at risk, and not secured with a view that this will lower their returns, therefore creditors can make an application for a provisional liquidator to be appointed.

Shareholders

One or more shareholders can apply for provisional liquidation if they feel that company directors are not acting in the company’s interests. These include acting improperly, or a significant conflict of interest exists between a director and the company.

The company

The company itself my make an application – if the directors want to avoid claims that they are trading wrongfully due to the company being insolvent, for example.

Why would a provisional liquidator be appointed?

A provisional liquidator would be appointed to preserve the company’s assets.

Regardless of which party makes the application for provisional liquidation, the application must provide a witness statement that lays out their grounds for applying. This generally includes the fact that the company is insolvent, and likely to have a winding-up order made against it, and that its assets are at risk.

There are two key issues concerning provisional liquidation. If a company is insolvent and there is a danger that its assets may be disposed of. It may well believe that the company’s books and records could be destroyed, then the court may use its discretion to appoint a provisional liquidator to protect company assets and property, in the interest and benefit of creditors.

There are a few relatively rare instances where a provisional liquidator can also be appointed to take charge of the company. These are deemed in the public interest by the court, usually large fraud or clients moneys are involved. In these cases they usually follow an investigation by the Companies Investigation Branch.

Are Companies aware of an application for provisional liquidation?

Companies usually are not aware that an order is to be made to appoint a provisional liquidator. Applications are made either ‘with notice’ or ‘without notice’ to the company. When the reason for making the application is based on a fear that assets will be dissipated, it is clear that giving notice to the company will compromise the ability to protect those assets.

In these circumstances, given the inherent urgency of an application, it is unlikely that a company will be made aware. If they are provided with notice, the Company Investigations (CI) lets the company know that the Official Receiver will be appointed provisional liquidator, and the grounds for doing so.

What happens during provisional liquidation?

Once a provisional liquidator has been appointed, namely The Official Receiver or a licensed insolvency practitioner (IP), They will take control of the company from its directors, including company assets, books, and documentation.

The liquidator is not generally provided with the power to realise assets during a provisional liquidation, they are appointed to preserve them, and to investigate the claims made in the application.

Ways to end a provisional liquidation?

Provisional liquidation duties usually ends in one of three ways:

  • A winding-up order against the company is granted by the court
  • A court order discharges the provisional liquidator from their duties
  • The original winding-up petition is dismissed by the court

Once the provisional liquidator has carried out their investigations, and a winding-up order is granted, the results can deliver serious issues for directors.

These issues include personal liability for business debts, disqualification as a director, as well if there has been fraudulent activity carried out, a criminal investigation will follow.

Should you require further information about provisional liquidation, or any aspects of an investigation by the Companies Investigation Branch with what impact its long term long-term ramifications will have on directors, our licensed insolvency practitioners can help.

F.A.Q’s

What is meant by provisional liquidator

A provisional liquidator means an individual appointed by the court in respect of a company, usually for the purpose of ensuring the preservation of the company's assets or conducting investigations

What are the powers of a provisional liquidator?

The powers of a provisional liquidator are (a) To protect the assets pending the outcome of the petition hearing; (b) To safeguard the company's records; (c) To investigate the company's affairs only in so far as it is necessary to discover, protect and recover assets.

What is the difference between provisional liquidator and company liquidator?

The difference between provisional liquidator and company liquidator are unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.

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