A Quick Guide to Provisional Liquidation

22 March 2021

Liquidation refers to the process in which a company ultimately ceases to operate, its business and assets are sold and turned into cash. This process allows creditors of the company to be paid from the asset realisations. Liquidation is usually a last resort and occurs if a company can no longer survive.

Broadly, liquidation can be broken up into two categories; voluntary and compulsory (court liquidation). As the terms suggest, voluntary liquidation is enacted by a business’ directors and shareholders. Court liquidation, on the other hand, is usually forced upon a company at the request of a creditor or creditors (through a winding up application) and is enforced by the court.

Provisional liquidation is an emergency measure. An application is made to the court to have a provisional liquidator appointed, and the court itself has the power to place the company into provisional liquidation. This can happen 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 hasn’t been handed down.

Since the liquidation process can be reversed once a provisional liquidator has been appointed (if the company isn’t wound up at the hearing), the process is referred to as “provisional.” The court usually has to be convinced that the company’s assets are at risk before it will place the company into provisional liquidation.

Who can apply to place a company into Provisional Liquidation

Creditors or shareholders can apply to the court for a provisional liquidator to be appointed. In some cases ASIC might make an application for a company to be placed into provisional liquidation where the company is at risk or undertaking suspicious activities. Finally, APRA could also apply to a court to have a provisional liquidator appointed.

The role of the provisional liquidator

In a Provisional Liquidation it’s the liquidator’s duty to take control over the company and safeguard its assets until the hearing on the wind-up application occurs and the provisional liquidator can present an objective and informed opinion to the court regarding the financial state of the company. The directors no longer have control over the company’s assets and operations and at the same time, a stay of proceedings takes effect so no court action against the company can begin without the court’s permission

The benefits of appointing a provisional liquidator

Some of the key advantages of provisional liquidation include protection of assets and having an independent party investigating the company’s affairs.

            Protection of assets

The provisional liquidator safeguards the assets of the company (which is usually in financial distress) by removing control from company directors and officers, provisional liquidation can ensure the company is controlled by an independent third party who acts in the company’s (and creditors or shareholders) best interests.

            Objective investigation

The provisional liquidator reviews the company’s operations and provides the court with an objective, independent opinion of the affairs of the company.

Rodgers Reidy — insolvency experts

Rodgers Reidy has a long and established history of helping both individuals and companies who find themselves unable to repay debts. Whether you find yourself in bankruptcyliquidation, or voluntary administration, Rodgers Reidy experienced team possesses the specialist skills and knowledge to assist.

With offices across Australia and the broader Asia-Pacific region, Rodgers Reidy have dealt with liquidations both large and small. If you are facing provisional liquidation or wish to discuss issues concerning financial management, contact Rodgers Reidy today.

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