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What is provisional liquidation?

The Insolvency Act, 1986, allows for the appointment of a provisional liquidator under certain circumstances, and this effectively takes control of a company away from its directors.

Provisional liquidation can occur following the presentation of a winding-up petition, but before the associated court hearing. It is ostensibly used as an emergency measure to safeguard the failing company’s assets.

Begbies Traynor are specialists in company liquidation, and are available for appointment as provisional liquidator.

Who can apply for a provisional liquidation?

Creditors

If a creditor believes company assets may be at risk, and would therefore lower their returns, they can make an application for a provisional liquidator to be appointed.

Shareholders

One or more shareholders can apply for provisional liquidation if they feel that company directors are not acting in the company’s interests, are otherwise acting improperly, or a significant conflict of interest exists between a director and the company.

The company

Application may be made by the company itself – if the directors want to avoid claims that they are trading wrongfully due to the company’s insolvency, for example.

Why would a provisional liquidator be appointed?

Whichever party makes the application for provisional liquidation, they must provide a witness statement that lays out their grounds for applying. This generally includes the fact that the company is insolvent, and likely to have a winding-up order made against it, and that its assets are at risk.

There are two key issues concerning provisional liquidation. If a company is insolvent and there is a danger that its assets may be disposed of, or its books destroyed, the court may use its discretion to appoint a provisional liquidator to protect company assets and property, for the benefit of creditors.

In relatively rare instances, a provisional liquidator can also be appointed to take charge of the company if it is deemed in the public interest by the court.

Will the company be aware of an application for provisional liquidation?

An application can be made either ‘with notice’ or ‘without notice’ to the company. When the reason for making the application is based on a fear that assets will be dissipated, it is clear that giving notice to the company will compromise the ability to protect those assets.

In these circumstances, given the inherent urgency of an application, it is unlikely that a company will be made aware. If they are provided with notice, the Company Investigations (CI) lets the company know that the Official Receiver will be appointed provisional liquidator, and the grounds for doing so.

What happens during provisional liquidation?

The Official Receiver, or a licensed insolvency practitioner (IP), will be appointed. They take control of the company from its directors, including company assets, books, and documentation.

In these cases, the liquidator is not generally provided with the power to realise assets – they are appointed to preserve them, and to investigate the claims made in the application.

How does a provisional liquidation end?

Provisional liquidation usually ends in one of three ways:

  • A winding-up order against the company is granted by the court
  • A court order discharges the provisional liquidator from their duties
  • The original winding-up petition is dismissed by the court

The investigations carried out by the provisional liquidator, and also by the liquidator if a winding-up order is granted, can result in serious issues for directors. These include personal liability for business debts, disqualification as a director, and if fraudulent activity is discovered, a criminal investigation.

If you require further information about provisional liquidation, its impact on directors and long-term ramifications, our licensed insolvency practitioners at Begbies Traynor can help. We offer free same-day consultations to quickly establish your needs, and operate from over 40 offices around the UK.

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