What is Provisional Liquidation?
Provisional liquidation is a legal process that temporarily freezes a company’s assets while its financial situation is assessed.
This article aims to provide a comprehensive understanding of provisional liquidation, its implications for business owners, and how to navigate the complexities involved. Whether you’re facing financial difficulties or are a stakeholder in a company considering this option, understanding the ins and outs of provisional liquidation is crucial for making informed decisions.
- What is a Provisional Liquidation?
- Who can apply for a provisional liquidation?
- Will the company be aware of an application for provisional liquidation?
- What Powers Does the Provisional Liquidator Have?
- What happens during provisional liquidation?
- How is the Provisional Liquidator Paid?
- When Does Provisional Liquidation end?
- How does a provisional liquidation end?
What is a Provisional Liquidation?
Provisional liquidation is a court-ordered procedure that temporarily halts a company’s operations and freezes its assets while a full assessment of its financial health is undertaken. The process is typically initiated to protect the assets of a company that is facing severe financial distress, insolvency, or allegations of misconduct, pending further legal action or a more comprehensive liquidation process.
Unlike a standard liquidation, where the company’s assets are immediately sold off to pay creditors, provisional liquidation aims to preserve the company’s assets and maintain its value. This provides a window for stakeholders to assess the best course of action, which could include restructuring, complete liquidation, or other legal remedies.
The appointment of a provisional liquidator is a significant step. This individual is responsible for taking control of the company’s assets, assessing liabilities, and ensuring that no assets are dissipated unlawfully. They act in the best interests of all stakeholders, including creditors and shareholders, to safeguard the company’s value.
While the process aims to protect a company’s assets, it does come with its own set of challenges. These can include reputational damage and a loss of control for the directors and owners. Therefore, provisional liquidation is generally considered a last resort, to be initiated only when other options for saving the company have been exhausted or are deemed unsuitable.
Who can apply for a provisional liquidation?
Anyone can apply for a provisional liquidation, but the most common applicants are:
- Creditors: A creditor can apply for a provisional liquidation if they believe that the company is insolvent and that there is a risk that the company’s assets will be dissipated or concealed.
- The company itself: The company itself can apply for a provisional liquidation if it is insolvent and believes that it is in the best interests of its creditors.
- The Official Receiver: The Official Receiver can apply for a provisional liquidation if they believe that the company is insolvent and that there is a risk of public harm.
To apply for a provisional liquidation, the applicant must file a petition with the court. The petition must set out the grounds for the application and the evidence in support of those grounds.
If the court is satisfied that the applicant has made out a prima facie case for the provisional liquidation, it will grant the petition and appoint a provisional liquidator.
Will the company be aware of an application for provisional liquidation?
The court will typically give the company notice of the application and an opportunity to respond. The company may also be represented by lawyers at the hearing of the application.
However, there are some cases where the court may grant a provisional liquidation without giving notice to the company. This is typically only done where the court believes that there is a risk that the company’s assets will be dissipated or concealed if the company is given notice of the application.
If a provisional liquidation is granted without notice to the company, the company will be notified as soon as possible after the order is made.
Here are some examples of situations where the court may grant a provisional liquidation without notice to the company:
- Where the company’s directors have been accused of fraud or other wrongdoing.
- Where the company’s assets are at risk of being dissipated or concealed.
- Where the company is about to enter into a transaction that would prejudice the interests of creditors.
- Where the company is unable to pay its debts as they fall due.
What Powers Does the Provisional Liquidator Have?
The powers of a provisional liquidator vary depending on the jurisdiction and the specific court order that appoints them. However, there are common powers and responsibilities that provisional liquidators generally hold.
- Freezing the company’s bank accounts.
- Taking control of the company’s premises and records.
- Investigating the company’s affairs.
- Securing the company’s assets.
- Preventing the directors from disposing of or concealing assets.
- Appointing a custodian to manage the company’s day-to-day operations.
- Appointing inspectors to conduct investigations on the provisional liquidator’s behalf.
- Applying to the court for search warrants and other orders to assist with the investigation.
What happens during provisional liquidation?
Once the provisional liquidator has been appointed, the company directors no longer have any control over the business. However, they can still apply to dismiss or resist the winding-up petition.
The court order that appoints the provisional liquidator will state whether the company can continue to trade or not. If it is to cease trading, the Official Receiver will decide whether to make employee redundancies.
Upon appointment of a provisional liquidator, employees from the Public Interest Unit (PIU) may visit the company’s offices to remove property. This property will be retained and returned to the directors if the winding-up order is dismissed. Otherwise, the assets will be sold to liquidate the business. The PIU is attached to the Official Receiver’s office and is part of the Insolvency Service.
How is the Provisional Liquidator Paid?
Payment for the provisional liquidator is fixed by the court and if a winding-up order is subsequently made, the provisional liquidator’s earnings will be paid as an expense of the proceedings and as a priority or from the proceeds of the asset sales.
When Does Provisional Liquidation end?
Provisional liquidation stops when a winding-up order is made, after which, the Official Receiver is appointed to act as liquidator, at least initially. When it comes to disposal of assets and distribution of process, a private insolvency practitioner may take over. Or, provisional liquidation ends if it is discharged by the court and the winding-up petition is dismissed.
How does a provisional liquidation end?
A provisional liquidation can end in one of three ways:
Winding-up order dismissed
(1) The winding-up order may be dismissed if the court finds that there is no evidence to support the winding-up petition. The court may also dismiss the winding-up order if the company is able to show that it is not insolvent and that it is likely to be able to pay its debts as they fall due.
(2) Company placed into administration
The provisional liquidator may recommend to the court that the company be placed into administration if they believe that the company has a viable business plan and that it can be rescued. Administration is a formal insolvency procedure that allows a company to continue to trade while it is being restructured.
(3) Winding-up order made
If the court makes a winding-up order, the provisional liquidator will become the liquidator and will be responsible for managing the company’s affairs until the liquidation is completed. The liquidator will sell the company’s assets and distribute the proceeds to creditors in accordance with the law.
Provisional Liquidation – a Different Process in Scotland
Provisional liquidation is more common in Scotland than in the rest of the UK because there are differences in the law. In Scotland, there is no Official Receiver, so a private insolvency practitioner is appointed as an interim liquidator.
As in the rest of the UK, the interim liquidator takes control of the company’s affairs upon appointment. Directors lose their management responsibilities. Scottish liquidations typically follow the court process, which has lower fees and a more streamlined procedure.