Provisional Liquidation can be an effective process to protect your interest in a Company and may be available to directors, shareholders, creditors and other eligible aggrieved parties. A Provisional Liquidator can step in as a caretaker of the Company. The role of a Provisional Liquidator includes the preservation and protection of the assets of the Company and maintaining the status quo, during the interim period prior to a winding up application being heard. The Company does not need to be insolvent for it to be placed into Provisional Liquidation.
For example, it may be appropriate for a Provisional Liquidator to be appointed in the following circumstances:
- A creditor of the Company (owed a debt by the Company) that is concerned that the Company or its Director(s) may be removing assets or inappropriately dealing with them (such as ‘phoenixing’ or creating a new entity and leaving behind the old entity and its debts).
- A shareholder who is concerned that the Director(s) may be acting without care and diligence or in their own interests and depleting the Company’s financial position.
- A director/shareholder dispute that is unable to be resolved amicably or by agreement and is impacting the Company’s business and assets.
In such circumstances, there may be a breakdown of trust between parties and the potential for the assets of the Company to be diminished or divested. As an aggrieved party you may have valid concerns and feel unable to control the process or prevent any reckless or inappropriate behaviour, before it is too late. The appointment of a Provisional Liquidator may be an appropriate measure to protect your interest in the Company and appoint an independent party to manage the Company’s affairs and ensure that its assets are protected.
Generally, a creditor or shareholder may make an application to Court to wind up the Company on various grounds – refer to sections 459Q and 461 of the Corporations Act 2001 (Cth) (the Act). After the filing of the application, you may make an application to Court for a Provisional Liquidator to be appointed prior to the winding up application being heard by the Court. A Court may make Orders to appoint a Provisional Liquidator where it is satisfied that the Company’s assets are at risk of being diminished.
A Provisional Liquidator will have most of the functions of a Liquidator prescribed by the Act, however, as it is an interim appointment, this will not generally include such things as investigating the Company’s affairs, recovering voidable transactions or distributing funds to creditors. Generally, a Provisional Liquidator will maintain the status quo and protect the Company’s assets until the Company is placed into Liquidation or the reason for the Provisional Liquidation is resolved (such as the shareholders reaching an agreement). However, a Provisional Liquidator may also have the authority to sell a Company’s business and/or its assets. This is in contrast to a Court Liquidation or Creditors Voluntary Liquidation, where the Liquidator will bring finality the Company’s affairs and sell and distribute its assets.
At the hearing of the winding up application, the Court may make orders to end the Provisional Liquidation and return control to the Director(s), wind up the Company or continue the Provisional Liquidation with a view to achieving a certain outcome – such as the sale of the Company’s business.
In summary:
- A Provisional Liquidation may be an appropriate measure if you have concerns regarding the Company, including the conduct of its directors, the diminishment of assets and/or potential insolvency concerns, where other alternatives to preserve the Company’s assets and business have been exhausted.
- If there is a saleable business or other assets, a Provisional Liquidation may allow for continuity, including preventing the termination of primary contracts, leases and/or insurances that may ordinarily be terminated by way of a Liquidation.
SV Partners are experienced insolvency and restructuring professionals. Contact your local SV Partners’ office today to discuss your options and get the right team and advice.
Article written by Monica Tilbrook (Manager) – SV Partners Sunshine Coast