Comprehensive Guide to Provisional Liquidation Procedure

When issuing a winding up petition, creditors’ rights include the right to seek the appointment of a provisional liquidator. While a winding up petition issued against your business can be a serious blow, being placed into provisional liquidation can be devastating. This article will cover exactly what provisional liquidation means for your business and when it has appropriate practical applications.


What is Provisional Liquidation?

A provisional liquidator can be appointed anytime between a winding up petition being presented, and a winding up order being made. An application for provisional liquidation can be made on the following grounds:

  • The company is insolvent and unable to pay its debts, and it is extremely likely a winding up order will be made.
  • There is a risk of dissipation of the company’s assets before the winding up hearing.
  • There is a risk of company books and records being lost and destroyed before the winding up hearing.
  • It is deemed in the public interest, i.e. the company’s trade is illegal or harmful to the public.

 

Provisional Liquidation

Provisional liquidation appointments are often made without notice to the company due to the nature of what is involved. This can mean that the first you are aware of what has happened is when the liquidator is through the door and taking control of your business. Once a provisional liquidator has been appointed, the director’s powers are effectively terminated as they would be when a company enters voluntary liquidation, or any other terminal insolvency procedure. The only remaining powers are to apply to dismiss or fight the winding up petition.

What are a provisional liquidator’s powers?

A provisional liquidator’s powers are much more limited than those of a liquidator appointed after the making of a winding up order or passing a winding up resolution. The basic powers of a provisional liquidator are:

  • To safeguard the assets of the company.
  • To preserve the company books and records.
  • To investigate the affairs of the company.
  • To sell any perishable assets to preserve their value.

In addition to this, the court may grant further powers as it deems fit, or upon application from the provisional liquidator. This can include the power to sell the business or its assets, if such a sale would generate a better return than if done after formally entering liquidation. This creates the potential for a pseudo pre-pack sale process with the court signing off on the sale if it deems it to be in creditors best interests.

Provisional liquidation in England & Wales

Where a provisional liquidator is appointed over a company in England or Wales, it will often be an exercise of creditors’ rights or an appointment in the public interest by the Secretary of State. It is often the case that the Official Receiver will be appointed as the provisional liquidator. However, it is possible for a creditor to seek appointment of a private insolvency practitioner.

Upon appointment, the Official Receiver will take immediate steps to secure the company bank account. They will also endeavour to inspect the company’s trading premises to secure all assets, books and records. The court order appointing the provisional liquidator may specify whether the company should continue to trade or not. If not, the Official Receiver will make a decision whether or not to continue trading, and if employees should be made redundant. A decision by the provisional liquidator to cease trading is likely to be the end for your business. This is another reason that any threat of a winding up petition must be taken seriously.

Provisional liquidation in Scotland

In Scottish insolvency cases, provisional liquidation can often have more practical applications. With companies using the court liquidation procedure to issue their own petitions, it is more discretionary as to whether they appoint their own provisional liquidator. Provisional liquidation is more common place in Scottish insolvency matters.

In Scotland, a provisional liquidator will always be a private insolvency practitioner, as the Official Receiver does not take appointments in corporate cases. Grounds for appointment by the board, or by the company can be as simple as preserving the assets of the company. In particular, if the company is still trading at the time and the director wishes to step away from the business. This is especially relevant with the issue of void dispositions, (reversible disposals of company assets) after the winding up petition has been presented.

Provisional liquidators add further value to the court liquidation procedure by opening the door to the prospect of a pre-pack sale of the assets. A provisional liquidator can seek powers from the court to market the business for sale, and seek further directions from the court to effectively rubber stamp the pre-pack sale. This is only if it can be persuaded that the sale is in the best interests of creditors.

What to do if facing provisional liquidation?

If a provisional liquidator is appointed, you will no longer have access to the company bank account or assets. This means that to pay the petition debt, or fight the petition, you will likely need to use personal funds. It is therefore important to deal with winding up petitions before they are issued rather than leaving it until it is too late. If your business is facing a winding up petition or has been threatened with the appointment of a provisional liquidator, now is the time to seek advice from one of our Business Rescue Experts.

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