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What is Provisional Liquidation?

What is Provisional Liquidation?

Provisional Liquidation may be valuable to protect against the misappropriation of assets. This article discusses the benefits of provisional liquidation.

30th June 2020
Reading Time: 2 minutes

In the course of their business activities, some companies may become insolvent. This means they are unable to pay the debts that they owe. When this occurs, interested parties may apply to the Federal Court for the appointment of an Official Liquidator. This party looks to resolve the company’s financial difficulties or wind up the company. In the interim stage following application, there may be a risk of asset dissipation to the detriment of creditors and shareholders. To safeguard against this, a provisional liquidator may be appointed. This article will explore the provisional liquidation process.

Legal Requirements

The Corporations Act 2001 (Cth) states provisional liquidators may be appointed during an interim period. This period is the time between the filing of a winding-up application and the making of a winding-up order or resolution of an appeal. This liquidator must be a registered liquidator with the Australian Securities and Investments Commission (ASIC). Creditors, shareholders, the company itself and ASIC may all apply for provisional liquidation under certain circumstances.

When the provisional liquidator is appointed, the director/s’ duties and powers are removed. The provisional liquidator inherits these powers during this interim period along with fiduciary agency duties to the company. The liquidator then assumes responsibility associated with carrying on the company’s business.

Why Appoint a Provisional Liquidator?

The main reason courts appoint provisional liquidators on application is the risk of company asset dissipation. Generally, this risk arises out of the concerns of relevant parties regarding;

  • Director Behaviour – Circumstances in which directors act contrary to the company’s best interests. This may occur in the interim period before director powers are given over to the official liquidator.
  • Intra-Company Turmoil – Where there is a conflict between board members or employees, placing company control within the hands of a third party may be beneficial
  • Deceptive Practices – The debtor company may be seeking to hide assets from creditors. Alternatively, they may look to unfairly preference select creditors over others (unfair preference claims)

The role of the law in the interim period between application and instatement of an official liquidator is therefore to protect against the above risks.

The function of Provisional Liquidation

Provisional Liquidators safeguard company assets until the winding-up application concludes. They fulfill this function better than directors in some cases as they are an independent third party. Giving provisional liquidators control generally reduces the risk of asset dissipation.

In addition, the provisional liquidator may also fulfill the investigative functions of an official liquidator. This includes realising company assets and property. Because of this function, the provisional liquidator commonly becomes the official liquidator after the winding-up application is approved.

Activities Following Provisional Liquidation

Provisional liquidation ceases once the court orders the appointment of an Official Liquidator. At this point, the liquidation period begins. During Official Liquidation, the liquidator;

  • Investigates and reports company operations to creditors
  • Reports any issues to ASIC
  • Distributes company assets to creditors once they have been realised

Key Takeaways

  • Provisional Liquidation may be important. This is because it can protect company assets from the risk of asset dissipation
  • Interested parties can apply to court for provisional liquidation under differing circumstances
  • If your company is struggling to pay its debts, always seek professional legal advice from an insolvency lawyer

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Alistair Maclennan

Alistair is a Legal Intern at Lawpath. He is currently studying a Bachelor of Laws at Macquarie University. He is primarily interested in how changes in the digital space influence business activity, privacy, and freedom of speech.