A quick guide to provisional liquidation

What is provisional liquidation?

Provisional liquidation is an emergency procedure governed by the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 1986 (SI 1986/1925) (IR 1986).

A provisional liquidator can be appointed by the court only after a winding up petition has been presented (section 135(1), IA 1986). Provisional liquidation may be appropriate where there is a real concern that, between the presentation of the winding up petition and the making of a winding up order by the court, the company’s affairs will not be properly conducted or its assets will be dissipated. The main reason for appointing a provisional liquidator is to preserve the company’s assets.

During the period of a provisional liquidator’s appointment, the powers of the company’s directors are effectively terminated. The directors retain a residual power to apply to dismiss or resist the winding up petition (Ashborder BV and others v Green Gas Power Ltd and others [2005] EWHC 1031 (Ch)).

What is the procedure for putting a company into provisional liquidation?

winding up of the company has been presented at court, and then at any time before a winding up order is made (section 135(2), IA 1986).

The following categories of person may apply for an order for appointing a provisional liquidator:

• A creditor of the company (including the person who presented the original winding up petition).
• The company itself.
• Other categories of person listed in rule 4.25(1) of the IR 1986.

The application should be made by an application on Form 7.1A to a judge in the Companies Court (rule 7.3, IR 1986).

The application must be supported by a witness statement stating, among other things, the grounds on which the provisional liquidator is to be appointed.

The applicant’s evidence should, ideally, show that:

• It is likely that a winding up order will be made at the hearing of the petition.
• There is a risk of jeopardy to the company’s assets pending the hearing of the petition. This includes either dissipation of the company’s assets, or loss or destruction of the company’s books and records.

Given the nature of the remedy, provisional liquidation applications are often made urgently and without giving notice o the company or its directors. See rule 7.4(6) of the IR 1986 and Legal update, Urgent administration application made without notice was valid (High Court).

Where the application is made without notice:

• The applicant is under a duty to give full and frank disclosure to the court of all material facts. For details of the extent of the duty and the consequences of failing to comply with it, see PLC Dispute Resolution, Practice note, Duty of full and frank disclosure (www.practicallaw.com/2-204-1451).
• The applicant will generally be required to give a cross-undertaking in damages to compensate the company for any loss caused to it by the appointment of a provisional liquidator in the event that the petition to wind up the company is dismissed (Re Highfield Commodities Ltd [1984] BCLC 623).

When is it appropriate to appoint a provisional liquidator?

The circumstances in which the court will appoint a provisional liquidator to a company are not prescribed by statute or case law. However, the court may make an order when:

• The company is clearly insolvent, and it is likely that a winding up order will be made at the hearing of the petition.
• There is a risk of jeopardy to the company’s assets pending the hearing of the petition.

An appointment of a provisional liquidator may also be made where it is in the public interest.

An application for provisional liquidation may be made only in respect of a company that the English courts have jurisdiction to wind up. The English courts have discretion to appoint a provisional liquidator over a foreign company, as part of their jurisdiction over unregistered companies under section 221 of the IA 1986 (Re Real Estate Development Co [1991] BCLC 210).

The provisional liquidator

The person appointed as a provisional liquidator must be a qualified insolvency practitioner (section 388(1)(a), IA 1986), or the Official Receiver.

What does the provisional liquidator do?

The provisional liquidator only has the powers and functions conferred on him by the court and set out in the court order (section 135(4), IA 1986 and rule 4.26(1), IR 1986).
Generally, a provisional liquidator does not realise the assets of the company, or otherwise take steps to wind up the company as the reason for the appointment is the preservation of the company’s property.

One of the functions of a provisional liquidator may be to investigate whether the company’s property has been misappropriated or its business has been wrongfully conducted. However, a provisional liquidator himself has no power to bring certain proceedings under the IA 1986, including claims for wrongful trading, transactions at an undervalue and preference (In the matter of Overnight Limited [2009] EWHC 601 (Ch)).

Who pays the provisional liquidator?

The provisional liquidator’s remuneration is fixed by the court from time to time (rule 4.30(1), IR 1986). The court should take into account the matters set out in rule 4.30(2) of the IR 1986 and Practice Statement: The Fixing and Approval of the Remuneration of Appointees (2004) BCC 912.

If a winding up order is subsequently made, the provisional liquidator’s remuneration may be paid as an expense of the winding up according to the statutory order of priority (see Practice note, How are assets distributed to creditors in corporate insolvency procedures?. Otherwise, he is paid from the company’s property (rule 4.30(3), IR 1986).

When does provisional liquidation come to an end?

The provisional liquidation of a company ceases on:

• A winding up order being made (in which case the Official Receiver (www.practicallaw.com/6-107-5794) will be appointed to act initially as liquidator.
• An order of the court discharging the provisional liquidation.
• The winding up petition being dismissed.

(Rule 4.31, IR 1986.)