Author
David HillChief Operating Officer
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What is provisional liquidation?
Provisional liquidation is a court-ordered process that serves to protect the interests of a company and its associated directors, shareholders, creditors, and other qualified aggrieved parties whilst a winding-up application is on foot. This temporary measure involves appointing a provisional liquidator, who is a registered liquidator and an independent third party, to secure the company’s assets and oversee its affairs during the provisional liquidation.
When is provisional liquidation used?
Provisional liquidation might be used in three specific situations.
1. Creditor concerns
Creditors may apply for provisional liquidation if they suspect a company is hiding or misusing assets. A court-appointed liquidator takes control to protect those assets and investigate any wrongdoing.
2. Shareholder disputes
In cases of internal conflict, provisional liquidation protects company assets until the dispute is resolved. An independent liquidator ensures business operations are managed fairly and investigates any misconduct.
3. Impending insolvency
When a company is insolvent and facing liquidation, provisional liquidation preserves assets and protects stakeholder interests.
During the interim period, this measure allows for an independent evaluation of the company’s financial position and offers the opportunity for potential reorganisation or restructuring before official liquidation takes place.
What is the provisional liquidation process?
Submit an application
Eligible parties who can apply for the appointment of a provisional liquidator include:
- Creditors
- Shareholders
- Regulatory bodies such as ASIC and APRA
The application process typically requires demonstrating a valid reason for the appointment, such as a potential risk to the company’s assets or an urgent need to protect various stakeholders or public interest.
Appoint provisional liquidators
Provisional liquidation is an emergency measure. An application to appoint a provisional liquidator can occur at any time after a wind-up application has been filed and before the wind-up order has been made. It could also happen if there’s an appeal against a wind-up order pending and the decision on the appeal has not been handed down (s 472(2) of the Corporations Act 2001).
Court involvement
The role of the court is essential in ensuring that the provisional liquidation process is conducted in the best interest of all stakeholders. The court meticulously assesses the gravity of the situation and decides if the appointment is indispensable for protecting the company’s assets.
Provisional liquidation may be granted for various reasons, including the "just and equitable" ground, often applied in cases involving shareholder disputes, misconduct, or concerns about asset dissipation.
In some cases, the court may also grant the application without notice to the company or its directors if there is a valid justification for doing so.
Duties and responsibilities of a provisional liquidator
Primarily, a provisional liquidator is tasked with investigating any misappropriation of the company’s property or improper conduct in its business operations. Upon appointment, the provisional liquidator assumes control, including managing the company’s assets, supervising business operations, and conducting investigations.
Asset management
During the liquidation process, a provisional liquidator assumes a central role in preserving and protecting the company’s assets. By taking custody and control of all company property, the provisional liquidator ensures the assets are protected and maintained.
Business operations
Throughout the process, the provisional liquidator appointed bears the responsibility of:
- Maintaining business operations
- Securing continuity
- Managing the company’s affairs
- Sustaining the status quo
- Minimising disruption to the business while the liquidation process is ongoing
Investigations
Uncovering potential misconduct or mismanagement is a crucial element of a provisional liquidator’s investigative duties. The provisional liquidator conducts a thorough examination of the company’s financial position and operations, probing any misappropriation of property or business misconduct.
These investigations play a vital role in determining the appropriate course of action for the company, whether it involves official liquidation, reorganisation, or return of control.
Outcomes of provisional liquidation
Outcomes of provisional liquidation vary and hinge on the unique circumstances of each case. These outcomes may include:
- Formal liquidation
- Reorganisation
- Restoration of control to the company’s stakeholders
In most cases, the company continues through an official liquidation, and it’s common for the same provisional liquidator to continue as an official liquidator. This means the provisional liquidation stage ends because the company enters liquidation.
However, in some cases, provisional liquidation could end because of successful reorganisation. The company’s operations and finances could be successfully reorganised during the provisional liquidation stage with the company returning to normal operations and solvency.
Seek professional advice
Mackay Goodwin are trusted leaders in corporate financial advisory. If you're exploring the option of appointing a court-ordered provisional liquidator, our experts can guide you with clear, strategic advice. Book a free consultation today.
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