What is provisional liquidation?
A provisional liquidation is the Court appointment of a liquidator to a company in the period between the filing of the application to wind up the company and the Court hearing the application.
The appointment is provisional because the company may not be wound up at the hearing of the application, or another official liquidator may be appointed at that time. The appointment is more of a caretaker role as the provisional liquidator is required to maintain the status quo.
Why apply for a provisional liquidation?
The Court will appoint a provisional liquidator when it is convinced that the assets of the company are in danger of being dissipated or otherwise lost before the winding up application is heard. In effect, the appointment is made to protect the company's assets. Other reasons may be that:
(a) there is some form of stalemate or dispute internally with the company leadership, or
(b) the company is insolvent and needs an external administrator appointed immediately for some other reason.
How do you get a provisional liquidator appointed?
This is a court appointment. The method is the same as applying for the winding up of the company, with both applications usually filed at the same time. The hearing for the provisional appointment is heard shortly after the application is filed and the winding up application heard about 4 weeks later - depending on when the Court can hear the application.
Who may apply?
Three parties may apply for an appointment of a provisional liquidator.
1. Creditors making a winding up application may apply if they believe that the assets of the company are at risk of being lost or made otherwise unavailable during the period before the winding up application is heard.
2. Members (shareholders) of a company may apply where they believe that the directors of the company are acting improperly, recklessly or in their own interests. These applications do not necessarily need to show that the company is insolvent, only that it is just and equitable that the company be wound up and that an independent person should take immediate control of the company. These applications are usually made by minority shareholders who do not have the voting powers to remove and appoint directors.
3. The company (through its directors) may apply when it is applying to have itself wound up. This may arise due to a dispute between directors and other officers, or because the company is insolvent and the directors do not want to risk insolvent trading claims in the period before a official liquidator is appointed.
Who can be a provisional liquidator?
Only official liquidators may be appointed as provisional liquidators.
What does a provisional liquidator do?
The main role of the provisional liquidator is a caretaker to the assets and business of the company. While his or her powers may be extensive and absolute, the provisional liquidator will generally try to have as little impact on the company as possible.
What powers do they have?
The powers available to the provisional liquidator are extensive. They are granted by the Corporations Act and the Order of the Court under which they are appointed. The Order may limit or extend the powers granted under the Act, depending upon the individual circumstances. The provisional liquidator has the power to operate the business of the company or to close the business and sell off the assets. They have the power to call for proofs of debt, determine the priority of creditors and conduct investigations. But they do not have the power to recover void transaction or pay dividends.
What is the effect on the company?
The company structure itself survives the provisional appointment. The control of all assets, the conduct of any business and other affairs are transferred to the provisional liquidator. The directors cease to have any authority. At the end of the provisional liquidation, control of the company will either pass back to the directors, or to an official liquidator - depending on the outcome of the winding up application. In most cases the provisional liquidator will be appointed the official liquidator.
What is the effect on creditors?
The effect is identical to that of any other liquidation. As the appointment is provisional in nature and the company may not be wound up, those rights may once again become available to creditors.
Can a provisional liquidator pay dividends?
No. There is no power to pay dividends.
When does a provisional liquidation end?
Usually this will be at the hearing of the application to wind up the company when the application will either be:
(a) dismissed, ending the appointment, or
(b) granted, turning the appointment into an official liquidation.
The Court may also order that the appointment ends, either on an appeal to the original appointment, or where the Court is convinced that it is proper to end the appointment.
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