What is Provisional Liquidation?

March 8, 2024 / Business Insolvency

During voluntary liquidations, for both solvent and insolvent companies, directors retain a larger degree of control than with involuntary liquidations. Due to this control, directors may appoint their preferred insolvency practitioner, influence when the procedure begins, and so on. However, there are some instances wherein directors lose any control over their company’s liquidation. Such instances are often the case with the involuntary liquidation of insolvent companies.

During instances of involuntary liquidation, such as the serving of a winding-up petition and ensuing compulsory liquidation, companies may be entered into provisional liquidation. This state aims to secure a company’s assets, ensuring they remain within the company and cannot be withdrawn before formal liquidation, while also giving authorities the opportunity to assess the company’s assets. These assets will be recorded, noting their quantity and value, for later disposal.

In this article, Clarke Bell provides a detailed overview of provisional liquidation, covering when the procedure might be used, how it works, and the implications for companies.

What is provisional liquidation?

Provisional liquidation is a procedure companies can be forced into during certain scenarios. Insolvent companies with outstanding allegations of misconduct, awaiting serious legal action, or experiencing irreparable financial distress are likely candidates for provisional liquidation. In such cases, a court may order a company into provisional liquidation as a means of protecting its assets, ensuring directors or shareholders cannot withdraw assets from the company to avoid repaying creditors.

In practice, provisional liquidation can be viewed as a prelude to formal liquidation. Unlike other types of liquidation, assets will not be immediately disposed of to raise funds for the repayment of creditors. Instead, provisional liquidation will see a company’s assets recorded, and efforts will be made to keep assets at their current value. To achieve this goal, a provisional liquidator will take charge over the company, leaving directors with little influence over proceedings. Given this fact, provisional liquidation is rarely utilised by a company’s directors, and is typically forced upon a company by a third party.

Advice You Can Trust

Clarke Bell have been liquidating companies since 1994

Get Help Now

Who can apply for provisional liquidation?

It is possible for directors to apply for provisional liquidation, though it is quite uncommon, and potentially unfavourable, for directors to do so. Instead, it is more likely that a third party will apply for a provisional liquidation. Creditors, for example, are one of the main parties that apply for provisional liquidation. Creditors may do so if their debtor is insolvent and likely unable to make a recovery. In this instance, provisional liquidation is potentially in their best interests. Additionally, an Official Receiver, who will be appointed as part of a winding-up procedure or compulsory liquidation, may apply for provisional liquidation in certain cases. This typically happens when an Official Receiver suspects that a company may encounter reputational damage, reducing the value of its assets, or may attempt to withdraw assets from the company unlawfully.

When might provisional liquidation be used?

Provisional liquidations are predominantly used in three cases, each involving insolvent companies facing severe financial issues. Most commonly, creditors will apply for provisional liquidation as a means of better ensuring repayment. In this instance, provisional liquidation will be followed by a winding-up petition and later compulsory liquidation. For much rarer cases, directors will apply for provisional liquidation of their own accord.

In most other cases, provisional liquidation will be ordered by a court. Courts will usually enforce a provisional liquidation when a company is believed to be a risk, either to the public, or due to suspicion that they will attempt to dispose of assets or records unlawfully. Provisional liquidation mitigates this risk, making it much more difficult for companies to act against the interests of creditors.

How does provisional liquidation work?

If provisional liquidation is deemed appropriate, such as in the aforementioned scenarios, then a provisional liquidator will be appointed to the company in question. At this stage, the company’s directors will essentially lose all control over their company and future proceedings. Depending on the reasoning behind the provisional liquidation, the company will either be permitted to continue trading, or must cease immediately. In the latter case, the provisional liquidator must determine whether or not to make employee redundancies.

In scenarios wherein the company is either believed to be a risk to the public or creditors, assets will be recorded and potentially even seized. This will be done by the Public Interest Unit (PIU), which will be facilitated by an Official Receiver if deemed necessary. If directors disagree with the situation at hand, they retain the right to dispute the winding-up petition, assuming they have reason to do so. A successful dispute will see the winding-up petition set aside, relieving the company from provisional liquidation and resulting in the return of its assets. If no dispute is made, then the company will be placed into formal liquidation at a later date.

How does provisional liquidation affect a company?

Provisional liquidation has two main effects on a company, with the most obvious being impending liquidation. Once entered into provisional liquidation, the next step is almost certainly the serving of a winding-up petition and subsequent compulsory liquidation. As such, directors of companies entered into provisional liquidation must adequately prepare for this next step, and dispute it if eligible.

The second main impact on a company is reputational damage, especially if the company is forced to cease trading. Once a company’s provisional liquidation is known to the public, it becomes readily apparent that it either faces severe financial difficulty, or is viewed as a risk in some form. As such, it is entirely possible that both the public and business partners adopt a negative view of the company in question. This view may even persist after the provisional liquidation has been resolved.

How does provisional liquidation end?

Provisional liquidation is a temporary state for a company, typically acting as a precursor to more severe action. As we have mentioned, this action usually comes in the form of a winding-up petition. Once served, a winding-up petition will lead to compulsory liquidation, marking the end of both the company and its provisional liquidation. However, another ending is possible. If a company’s directors have evidence suggesting the winding-up petition contains errors, they may be able to lodge an objection. If successful, this will result in the winding-up petition being set aside, and the provisional liquidation will end with it.

Clarke Bell can help

Provisional liquidation is not an ideal situation for an insolvent company. It often marks the upcoming end of a company, leaving directors with very few options. Instead of waiting for a provisional liquidation to be enforced, it can be better to consider insolvency procedures to broaden your options and ensure a more favourable outcome. Clarke Bell can help you in this regard.

We have more than 29 years of experience in helping insolvent companies find solutions to their financial issues. We can do the same for you.

Our team of experts can help you find and implement methods of recovery, or help you close your company using the best procedure possible. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.