What is Provisional Liquidation?

Provisional liquidation is a temporary measure used to protect the assets of a company in certain situations. The law on provisional liquidation allows the provisional liquidation process to be activated only under certain circumstances.

Whether you’re a creditor, shareholder, or director of a company, you might be considering provisional liquidation to protect and preserve the company’s assets.

When is provisional liquidation used?

Provisional liquidation might be used in three specific situations.

1. Creditors concerned debtor company is hiding assets

For creditors concerned about a debtor company hiding assets or making assets unavailable, provisional liquidation could be a potential course of action to consider. Creditors might also consider this option if they’re worried about dissipation of assets in the lead-up to a wind-up application being heard.

2. Shareholders believing directors acting recklessly

Shareholders concerned about directors’ conduct could pursue provisional liquidation to bring in an external administrator (the provisional liquidator) and protect the company’s interests. The shareholders might be concerned that the directors are acting unprofessionally, recklessly, or in a self-interested manner that’s not in the best interests of the company.

3. Dispute between directors or insolvent company before liquidation

If the company directors are involved in a dispute, this can compromise the future direction of the company. In this case, bringing in a provisional liquidator could protect the company and its assets until matters can be resolved. Alternatively, the company could be insolvent and requiring protection until an official liquidator can be appointed. In this case, bringing in a provisional liquidator can help protect the company’s assets until the liquidation process is formalised.

How and when are provisional liquidators appointed?

Provisional liquidation is an emergency measure. An applicationis made to the court to have a provisional liquidator appointed, and the court itself has the power to appoint the provisional liquidator. This can happen at any time after a wind-up application has been filed and before the wind-up order has been made. It could also happen if there’s an appeal against a wind-up order pending and the decision on the appeal hasn’t been handed down (s 472(2) of the Corporations Act 2001).

Since the liquidation process can be reversed once a provisional liquidator has been appointed (if the company isn’t wound up at the hearing), the process is referred to as “provisional.” The court usually has to beconvinced that the company’s assets are at risk of being dissipatedbefore it will appoint a provisional liquidator.

Who can apply for a provisional liquidator to be appointed?

Creditors, members or shareholders, and the company (typically where it has pursued its own winding up) can apply to the court for a provisional liquidator to be appointed. In some cases ASIC has been known to apply for a provisional liquidator. ASIC might get involved in cases where the company has lost investor’s money under suspicious circumstances, engaged in transactions that don’t have a clear commercial purposes, and contravened record-keeping and account-keeping laws. Finally, APRA could also apply to a court to have a provisional liquidator appointed.

The role of the provisional liquidator

It’s the provisional liquidator’s duty to take control over the company and safeguard its assets until the hearing on the wind-up application occurs. When the provisional liquidator takes charge, the directors no longer have control over the company’s operations. At the same time,a stay of proceedings takes effectso no court action against the company can begin without the court’s permission.

The provisional liquidator has all the powers of the directors to carry on the company’s business and similar powers to a liquidator as if the company were be wound up. He or she owes fiduciary duties to the company as a controlling agent while acting as an officer of the court.

Benefits of appointing a provisional liquidator

Some of the key advantages of provisional liquidation include protection of assets and having an independent party investigating the company’s affairs.

• Protection of assets
  The provisional liquidator protects assets of the company (which is usually in financial strife) during a critical stage where the risk of asset dissipation could be high. By removing control from company directors and officers, provisional liquidation can ensure the company is controlled by an independent third party who acts in the company’s best interests.
• Objective investigation
  The provisional liquidator reviews the company’s operations and provides the court with an objective, independent opinion of the affairs of the company.

What happens after provisional liquidator has been appointed?

In most cases, the company will continue to an official liquidation, andit’s common for the same provisional liquidator to continue as an official liquidator. This means the provisional-liquidation stage ends because the company enters liquidation. However in some cases, provisional liquidation could end because of successful reorganisation. The company’s operations and finances could be successfully reorganised during the provisional-liquidation stage with the company returning to normal operations and solvency.

The interim period between the wind-up application being filed and the wind-up hearing itself can be a critical time. The role of the provisional liquidator is designed to preserve and control the company’s operations and assets until the final wind-up decision is made by the court.

The appointment of a provisional liquidator is a fairly uncommon process that can only happen between the filing of a wind-up application and the hearing and decision on the application. It’s a possible course of action for regulators (ASIC and APRA) as well as shareholders and creditors who might be concerned about asset dissipation before formal liquidation. However, provisional liquidation doesn’t always result in liquidation and in rare cases companies could return to solvent trading after the appointment of a provisional liquidator.

Australian Debt Solvers are industry leaders in financial advisory matters for companies with financial challenges. If you’re considering bringing in a court appointed provisional liquidator to take charge of your business, we can help your with expert advice.