Provisional liquidation is an emergency measure, which is included within two key pieces of legislation, the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016.
The person appointed as a provisional liquidator must be a qualified insolvency practitioner or the Official Receiver and they have a ‘holding’ role until a final decision is made about a company’s future.
How is a Provisional Liquidator Appointed?
A provisional liquidator can only be appointed by a court once a winding-up petition has been presented, whether by a creditor or the company itself. It is not uncommon for applications to be made by the Department for Business, Innovation and Skills or HMRC.
Why is a Provisional Liquidator Appointed?
The main reason is to preserve a company’s assets. This could be when there is serious concern that an insolvent company is not being properly run and there is risk that individuals in the business may seek to sell off assets for their own benefit, rather than the proceeds going to creditors. Or, it may be believed that company accounts and other records could be removed and/or destroyed. Alternatively, it may be strongly suspected that there are illegal activities going on including those where consumer harm is likely. As such, provisional liquidation can allow a period for thorough investigation, without interference from directors.
What Happens When a Provisional Liquidator is Appointed?
Once the provisional liquidator has been appointed, the company directors no longer have any say in running the business. They do, however, still have a residual power to apply to dismiss or resist the winding-up petition.
The court order that appoints the provisional liquidator should also state if the company can continue to trade or not. If it is to cease trading, the Official Receiver will make a decision on employee redundancies.
Upon appointment of a provisional liquidator, it is also likely that employees from the Public Interest Unit will visit the company’s offices and remove property. This will be retained and returned to directors if the winding-up order is dismissed or the assets will be sold if the business is liquidated. The Public Interest Unit is attached to the Official Receiver’s office and a part of the Insolvency Service.
Will Directors be Warned of Provisional Liquidation?
This is unlikely as the court hearing is usually taken urgently and without any notice given to the company or directors. The applicant – typically a creditor – will be asked to provide full and frank disclosure so that a decision can be reached. They will be expected to produce evidence to show that the company’s assets are in jeopardy.
They will also usually be required to give a cross-undertaking in damages. This is a legally binding promise made to the court to compensate the company for loss or damage caused by appointing a provisional liquidator, should this be wrongful and the petition to wind up the business is dismissed.
What Powers Does the Provisional Liquidator Have?
They only have the powers as conferred on them by the court and which will be set out in the court order. They will therefore have less powers than an insolvency practitioner during full liquidation or the Official Receiver.
In most cases, the provisional liquidator does not realise the company’s assets – although they may sell perishable items. They also will not usually take steps to formally close it, as their main responsibility is to preserve the assets and the accounts and records. However, they may also make some investigations into whether assets have been taken dishonestly or other wrongdoing has occurred. Despite this, a provisional liquidator does not have the power to bring court proceedings under the Insolvency Act, such as claims for wrongful trading.
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.
Provisional Liquidation – a Different Process in Scotland
In Scotland, the appointment of a provisional liquidator is a more common practice than in the rest of the UK. This is because there are differences in the law – in Scotland, there is no Official Receiver and a private insolvency practitioner is appointed to act as an interim liquidator.
As elsewhere in the UK, the interim liquidator takes over on the granting of the court order and directors lose their responsibility for the company’s management. Liquidation in Scotland is usually through the court process, which has lower fees and a more streamlined process.