Provisional liquidation is a legal process designed to preserve the assets of a company facing insolvency, pending the outcome of a winding-up petition.
This process is designed to protect the interests of creditors and shareholders in situations where the company is facing insolvency, and there is a risk that its assets may be dissipated
Creditors, shareholders, or the company itself can apply if they believe books and records may be destroyed, or if they suspect directors of acting improperly.
If your company is facing financial difficulties and you’re concerned about the appointment of a provisional liquidator, contact our experienced insolvency team for confidential advice and guidance on your options.
What’s the Process of Instituting Provisional Liquidation?
Application: An interested party (company, directors, creditors, or shareholders) applies to the court for the appointment of a provisional liquidator, providing a witness statement that includes evidence of the company’s insolvency, the likelihood of a winding-up order, and the risk to the company’s assets[1]Trusted Source – GOV.UK – Duties and Functions of Provisional Liquidator.
Notice: Depending on the perceived risk to assets, the application can be made “with notice” or “without notice” to the company. “Without notice” means that the company is not informed about the application for a provisional liquidator.
Court decision: The court reviews the application and supporting evidence, and if satisfied, appoints a provisional liquidator (Official Receiver or licensed IP).
Appointment: The provisional liquidator takes control of the company’s assets, books, and records to preserve assets and investigate claims.
Exit: Provisional liquidation ends with either a winding-up order, discharge of the provisional liquidator, or dismissal of the winding-up petition.
Role of a Provisional Liquidator
Responsibilities of a Provisional Liquidator
A provisional liquidator has a chief responsibility to safeguard the company’s assets. This involves taking control of the company’s property, business operations, and financial documents to prevent any loss or damage.
The provisional liquidator also assesses the company’s financial situation, works to secure the assets, and may even continue the company’s business operations if deemed necessary to protect its value.
The provisional liquidator should investigate the company’s affairs only to the extent necessary to discover, protect, and recover assets. This may include examining transactions that could result in recovery actions if a winding-up order is made.
Dismissal of a Provisional Liquidator
The dismissal of a provisional liquidator happens once their role in preserving the company’s assets and assessing its financial state is complete or when a decision is made on the winding-up petition.
If the court decides to wind up the company, a liquidator is formally appointed to carry out the process, and the provisional liquidator’s duties end.
If the winding-up petition is dismissed, the provisional liquidator will be discharged, and control of the company’s assets will be returned to its directors.
Impact on Businesses and Creditors
Once a provisional liquidator is appointed, the control of the company shifts away from its directors to the liquidator. This can lead to a temporary pause in business activities, especially if the provisional liquidator decides it’s not in the company’s best interest to continue trading.
Financial Implications for Creditors in Provisional Liquidation
For creditors, provisional liquidation can be a double-edged sword. On the one hand, it offers a mechanism to preserve the company’s assets, potentially leading to a higher return on their claims if the company is eventually liquidated.
On the other hand, the process can delay payments and create uncertainty about the amount that will be recovered. Creditors should closely monitor the process and may need to submit their claims to the provisional liquidator to be considered for payment from the company’s assets.
FAQs about Provisional Liquidation
Can provisional liquidation be reversed?
Provisional liquidation is a temporary measure and can be reversed if the court dismisses the winding-up petition. In such cases, control of the company is returned to its directors.
Do company directors retain any powers during provisional liquidation?
Yes, directors retain certain residuary powers even when a provisional liquidator is appointed. For example, they have the power to oppose the finalisation of the provisional liquidation order on behalf of the company.
Are the powers of a provisional liquidator unlimited?
No, a provisional liquidator has only those powers which are specified by statute. There exists a gap between these statutory powers and the company’s capacity to act, which can still be exercised through its board, highlighting the limited scope of a provisional liquidator’s authority.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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